While cloud data specialist Snowflake stock (NYSE: SNOW) has taken a beating, falling by 65% year-to-date, the company outlook appears to be largely intact. During its annual investor day event held on Tuesday, the company reiterated its long-term outlook noting that revenue could touch around $10 billion annually by FY’ 29, with gross margins coming in at about 78%. Snowflake SNOW also outlined the expansion of its product beyond its core cloud data warehousing, introducing a new cybersecurity workload, while also making improvements to its platform to enable customers to gain insights on real-time transactional data and build products and applications faster. The company also raised its total addressable market estimate for its solutions to $248 billion, considering the new workloads.
Snowflake’s stock rose marginally following the news, compared to the broader Nasdaq which fell by almost 2% over Wednesday and Thursday. However, there are near-term challenges for the stock. With U.S. inflation surging and the Fed raising interest rates at a faster than anticipated pace, investors have shown a strong preference for companies with thick margins and cash flows, trading at reasonable multiples. This market rotation could continue to impact a loss making growth stock like Snowflake, which still trades at a lofty 18x forward revenue. The high multiple also makes the stock vulnerable to large swings when there is a slight change to near-term forecasts. For instance, over the last two earnings cycles, when the company highlighted a slight downward revision to margins and growth forecasts, the stock fell by over 15%. This could put the stock at a further risk of correction as the probability of the U.S. heading into a recession in the near-term looks high.
However, we still believe that Snowflake stock looks like good value for long-term investors. Snowflake is likely to remain a key beneficiary of the continued pivot from on-premise databases to cloud-based warehousing solutions, which are seen as more cost-effective and scalable. Snowflake is particularly well-positioned in this market, as its product works across cloud platforms such as Amazon’s AMZN AWS, Google Cloud, and Azure, and also offers more flexibility, as it separates storage from computing for the purpose of billing. The company’s new product and application launches should also enable it to boost consumption and billings on its platform.
We value Snowflake stock at about $220 per share, significantly ahead of the current market price. See our analysis Snowflake Valuation: Is SNOW Stock Expensive Or Cheap? for more details. See our analysis of Snowflake Revenue for more details on Snowflake’s business model and how its revenues are expected to trend.
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