Snowflake Inc. (SNOW) reported strong revenue and free cash flow (FCF) results for Q3 on November 20.
Revenue was up 28% YoY mostly from product sales of its cloud-based data platforms to businesses. Moreover, its FCF was 9% of sales, slightly higher than last quarter's 8% FCF margin, although lower than last year.
However, investors should pay more attention to the company's guidance for this year FY 2025.
The reason is simple. Most of the cloud data provider company's clients pay their annual Snowflake software subscriptions during Q4 and Q1.
This makes its SaaS revenue and FCF predictable and fairly easy to value SNOW stock. It also helps that the company has very low capex spending requirements.
As a result, these two quarters have outsized gains in free cash flow (FCF) and essentially make most of the year's FCF. That makes management's guidance about Q4 very important.
The bottom line is that Snowflake generates large amounts of free cash flow (FCF), making the stock worth much more in the future. This article will show how to analyze the company based on its strong FCF.
Projecting Q4 and Full Year FCF
Here is what management said -
- the adjusted FCF margin for its FY year ending Jan. 2025 (FY 2025) will be 26%
- product revenue will rise 23% YoY
Based on this we can project its free cash flow (FCF) for Q4 and the coming fiscal year FCF. It just takes a bit of reverse engineering of Snowflake's data.
For example, look at the table below that Snowflake provided:
Source: Snowflake's Q3 investor presentation, page 37, and Hake analysis
The table shows that the company's FCF margins occur mostly in Q4 and Q1. Based on management's guidance we can project out its FY 2025 (ending Jan. 31, 2025) and FY 2026 (ending Jan. 2026) free cash flow (FCF).
Here are three steps to use to reverse-engineer Snowflakes future FCF.
1. Estimate Q4 and FY 2025 revenue. Management provided guidance that its Q4 product revenue will rise 23% YoY (see above).
Last year it was $738.09 million, so this implies $907.85 million for Q4 2025 product sales (ending Jan. 31, 2025). After adding in est. $43 million in service revenue,
Total Sales Q4 FY 2025 = $907.85m +$43m = $950.85 million
Moreover, analysts polled by Seeking Alpha now project slightly higher sales in Q4 of $955.52 million.
As a result, since the table above shows that YTD revenue is $2.64 billion, total sales in FY 2025 will be close to $3.6 billion:
Total Sales FY 2025 = $955.85 m Q4 sales + $2,639.6 m YTD = $3,596m FY 2025 sales
2. Estimate FCF for Q4 and FY 2025. Management projected that full year FCF will be 26% of sales. That works out to $935 million in FY 2025 free cash flow:
FY 2025 FCF = 0.26 x $3,595m sales = $934.86 million
Moreover, we already know from the table above that YTD FCF is $518.4 million. Therefore, we can calculate that Q4 FCF will be huge:
Q4 FY 2025 FCF = $935m - $518.4 m = $416.6 million
That represents 43.8% of Q4 sales (see above):
$416.6m Q4 FCF / $950.85m Q4 sales = 0.438
That is higher than the 42% FCF margin it made last year (see the table above). This means that the company is experiencing operating leverage: it is extracting more FCF from operations as revenue rises.
3. Estimate FCF for FY 2026. Just to be conservative, let's assume that next year (FY 2026 ending Jan.31, 2026), Snowflake's FCF margin stays at 26%.
We can project this by using analysts' revenue forecasts for FY 2026. For example, Seeking Alpha's survey of 45 analysts is for 23% higher revenue ($4.42 billion):
FY 2026 revenue growth: $4.42 billion / $3.595b FY 2025 -1 = +22.95%
As a result, using a conservative 26% FCF margin, we can project that FCF will exceed $1.1 billion:
FY 2026 FCF = 0.26 x $4,420 million = $1,149 million
That represents a huge gain over FY 2025:
$1,149m FY 2026 FCF / $934.86m FY 2025 FCF -1 = +22.9%
Moreover, we can use this $1.15 billion FCF estimate to value SNOW stock using a FCF yield metric.
Projecting a Target Price
One way to value a fast-growing tech company like Snowflake is to assume that 100% of its FCF is paid out to investors. Then, we can estimate its future dividend yield. That is the same as a FCF yield metric.
For example, in the last 12 months (LTM), based on the past 4 quarters' data in the table above, Snowflake has generated $842.7 million in LTM FCF.
Since Snowflake today has a market capitalization of $56.1 billion, its FCF yield is 1.50%:
$842.7m LTM FCF / $56,100 m market cap today = 0.015
Therefore, we can use this 1.50% FCF yield to value the stock going forward.
Let's divide the projected FCF of $1.15 billion by 1.50%:
$1.15 billion FY / 0.015 = $76,667 m i.e., est. $76.67 billion market cap
That is almost 37% higher than its market cap today:
$76.67b est. 2025 market cap / $56.1b today – 1 = 1.3667 -1 = +0.36.67%
So, given that SNOW stock closed at $167.44 on Friday, Nov. 22, we can estimate its target price is $228.84 or roughly $229 per share:
1.3667 x $167.44 p/sh = $228.84 Target price in 2025.
Summary and Conclusion
Snowflake generates a huge amount of free cash flow and has high FCF margins with very low capex requirements. Moreover, its revenue is lumpy but highly recurring.
That makes it makes it fairly easy to value the company using analysts' revenue estimates and management's FCF margin guidance.
For example, it appears that, based on its Q3 guidance, Q4 FCF margins will be 43.8% vs. 42% last year. Moreover, using the company's 26% full-year FCF margin guidance going forward the company could generate 23% higher FCF next year (i.e., $1.15b FCF vs. $935m projected this year ending Jan. 31, 2025)). The bottom line is that, using a historical 1.5% FCF yield metric, SNOW stock is worth well over one-third more (+36.7%) or $229 per share.
