Shares of Snowflake (NYSE: SNOW) have gained close to 47% in the last three months, valuing the company at a market cap of $118 billion. These stellar gains have meant that the company is trading just 2% below all-time highs.
Snowflake provides a cloud-based data platform in the U.S. and other international markets. It offers Data Cloud which is an ecosystem that enables customers to consolidate data to drive business insights as well as build data-driven applications.
The company has managed to increase sales from $97 million in fiscal 2019 to $592 million in fiscal 2021 that ended in January. Let’s see why SNOW stock is one of the top-performing tech stocks this year.
Snowflake expected to end fiscal 2024 with $3 billion in sales
According to Wall Street, Snowflake is forecast to end fiscal 2024 with $2.97 billion in sales. Analysts expect revenue to grow by 93.9% to $1.15 billion in fiscal 2022 and by 64% to $1.88 billion in fiscal 2023.
Snowflake is poised to benefit from a rapidly expanding addressable market as well as certain competitive advantages. Unlike most other technology-oriented services-based companies, Snowflake does not operate a subscription-based business model. In fact, customers are charged on the amount of data they want to store as well as the extent of Snowflake Compute Credits used.
Enterprises expect this model to be a much more transparent approach where they are billed based on consumption or utility. Snowflake disclosed that 93% of its sales in fiscal Q2 of 2002 were consumption-based. In several cases, Snowflake permits the rollover of unused capacity on the purchase of additional capacity. Further, the Snowflake platform can be easily integrated with the infrastructure of other leading cloud service providers lowering data-sharing obstacles in the process.
Snowflake continues to expand its suite of products and solutions allowing it to gain traction in a high-growth vertical. It recently announced a partnership with UiPath (NYSE: PATH) which is a robotic process automation company. Here, UiPath will integrate its Insights platform with Snowflake’s data platform, accelerating the customer’s cloud adoption.
Stellar financial metrics for Snowflake in fiscal Q2 of 2022
In the second quarter of fiscal 2022, Snowflake’s product revenue growth more than doubled year over year while its net revenue retention stood at a robust 169%. It suggests existing customers increased spending by 69% on Snowflake’s platform in the last year. Its net retention rate stood at 158% in Q2 of fiscal 2021.
Snowflake ended the quarter with 116 customers that generated over $1 million in annual sales. These contact durations are also increasing along with the largest customer commitments. Snowflake ended Q2 with a customer base of 4,990, representing a 60% growth compared to the year-ago period. The number of Fortune 500 customers has also increased from 158 to 212 in the last 12-months prior to Q2 of fiscal 2022.
One important factor that investors need to consider before investing in Snowflake is the company’s improving profit margins. Its gross margin stood at 63% in fiscal 2020 and has since expanded to 73%. Similar to most other tech firms, Snowflake will also benefit from high operating leverage and is expected to end fiscal 2022 with adjusted free cash flow as a percentage of revenue of 5%.
What next for SNOW stock investors?
SNOW stock is trading at an extremely steep valuation and has a forward price to 2023 sales multiple of 62.8x. Further, it still remains unprofitable on an adjusted basis but analysts expect loss per share to narrow to $0.16 in fiscal 2023 from a loss of $1.56 per share in fiscal 2021.
Snowflake’s valuation is sky-high making the stock extremely vulnerable in a broader market sell-off. But any significant price correction in SNOW stock should be viewed as a buying opportunity by long-term investors.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
