Think of Snowflake stock as a proxy on the growth of cloud computing giants Amazon.com (AMZN), Microsoft (MSFT) and Alphabet‘s (GOOGL) Google. Worries that public cloud growth would slow if the US economy falls into a recession is one concern for SNOW stock.
Snowflakes (SNOW) sells data analytics and management tools that run on cloud computing platforms. SNOW stock has retreated 52% in 2022.
Investors should be cautious of any buys amid the bear market and Fed rate hikes. Technical ratings for SNOW stock have weakened.
One of the software industry’s most expensive stocks in 2020 and 2021, Snowflake’s trading multiple is down significantly. But analysts still debate the valuation of Snowflake stock amid stellar, but decelerating, revenue growth.
Because Snowflake’s business model is consumption-based rather than subscription-based, bearish investors have raised concerns over a possible US recession curbing demand.
Snowflake aims to enable customers to access and distribute data across their business ecosystem, thereby accelerating business intelligence and advanced analytics.
Snowflake reported a bigger-than-expected loss for the July quarter but revenue handily beat Wall Street views, sending SNOW stock soaring.
SNOW Stock: Biggest Software IPO
Snowflake stock pulled off the largest initial public offering ever by a software company in September 2020. The Snowflake IPO raised $3.4 billion.
The software sector is out of favor. One software benchmark — the iShares Expanded Tech-Software ETF (IGV) — is down 32.7% in 2022. But the index rose 7% in October. Meanwhile, the S&P 500 is down 19.3% in 2022.
Snowflake stock bulls tout its total addressable market — potential customer base in dollars.
“With a robust top-line growth profile, NRR (net revenue retention) sustaining above 170% in recent quarters, TAM expansion and continued margin improvements, we see a faster path to meaningful free cash flow generation as well as upside to the longer term $10 billion revenue target,” Morgan Stanley analyst Keith Weiss said in a recent note to clients.
Snowflake hosted a user conference and analyst day in Las Vegas in June. The company said new products in app development, data security and other areas will expand its TAM to $248 billion by 2027, up from $90 billion last year.
Snowflake Stock: Consumption Business Model
“With its roots in data warehousing, Snowflake has rapidly expanded on all fronts to become a data cloud company,” Jefferies analyst Brent Thill said in a note to clients.
At the user conference, the enterprise software maker reiterated its fiscal 2029 target for $10 billion in product revenue for SNOW stock. Snowflake said it expects its free cash flow margins to improve to 25% from 15%.
Most software stocks typically trade as a multiple of forward-looking revenue growth. Snowflake is not a software-as-a-service, or SaaS, company that aims to build recurring subscription revenue.
At the user event, the company addressed its concern over its consumption-based revenue business model. Snowflake revenue is tied to how much data its customers crunch and store. One issue is that usage could slow during a recession.
Another issue is that customers view Snowflake as expensive if they don’t control usage. Some analysts say there’s less transparency and predictability than with a subscription-based SaaS business model.
Snowflake in early 2022 made cloud infrastructure changes that impacted how customers are billed and slowed revenue growth.
SNOW Stock: Synergy With Cloud Computing Giants
In addition, SNOW stock in 2021 was dropped off the IBD Leaderboard. The Leaderboard is IBD’s curated list of leading stocks that stand out on technical and fundamental metrics.
Many companies are turning to cloud computing services as part of “digital transformation” projects that aim to gain business insights from crunching massive volumes of data. The cloud computing titans offer their own data analytics and management tools.
But the cloud giants make Snowflake’s platform available to their customers. The reason is Snowflake’s tools are better at some key tasks, such as letting companies compile, view, analyze and share massive amounts of data in an easy way.
Nearly two-fifths of Fortune 500 companies use Snowflake’s software in the cloud as they move away from on-premise data warehousing products from Teradata (TDC), Oracle (ORCL) and IBM (IBM).
Snowflake Stock: Competition Increasing
Further, Snowflake stock hit an all-time high of 429 in early December of 2020. But SNOW stock swooned amid analyst concerns over its lofty valuation.
Competition is increasing. Salesforce (CRM) recently introduced Genie, a real-time, data lake-house solution, that could clash with Snowflake at some point.
Whether Amazon Web Services or Google cloud ratchet up competition remains a concern for SNOW stock. Plus, competition with privately held Databricks is heating up. A recent funding round valued Databricks at $28 billion.
Databricks, which uses artificial intelligence, is expected to launch its own IPO. Hewlett Packard Enterprise (HPE), with its GreenLake platform, is another rival.
Two former Oracle engineers — Benoit Dageville and Thierry Cruanes — along with Marcin Zukowski, former chief executive of startup Vectorwise, started Snowflake in 2012. The company holds patents in database architecture, data warehouses and other areas.
SNOW Stock: ServiceNow Veterans Lead Company
Snowflake stock bulls point to its seasoned management team as a strength
Snowflake brought in Frank Slootman as CEO in May 2019. Slootman had stepped down as CEO of ServiceNow in early 2017. Former ServiceNow (NOW) Chief Financial Officer Mike Scarpelli in 2019 also joined Snowflake in the same CFO position.
Unlike legacy, on-premise data management systems, Snowflake’s platform was built from the ground up for cloud computing. It provides 100% of its software over the internet.
Snowflake customers can share data with their partners across multiple online storage systems using the company’s data warehouse. Snowflake also enables easily searchable data to be shared among applications.
Snowflake’s data analytics tools became available on Amazon Web Services in 2015, Microsoft’s Azure in 2018 and on Google’s cloud platform in 2020.
In June 2021, Snowflake partnered with C3.ai (AI). The two companies will cooperate in offering artificial intelligence tools to companies.
Amazon Web Services A ‘Frenemy’
“While Snowflake is multi-cloud, it derives some 85% of its revenues from data analytics jobs deployed on Amazon Web Services, which is also Snowflake’s biggest rival with AWS Redshift,” UBS analyst Karl Keirstead said in a recent note.
“This ‘frenemy’ relationship is critical to Snowflake’s success,” Keirstead went on to say. “AWS benefits far more from Snowflake spending on (computing) and storage infrastructure resources than they lose in the form of foregone AWS Redshift revenues.”
Snowflake has focused on six core markets, including financial services, health care and life sciences, retail and consumer packaged goods, advertising media and entertainment, technology and the government sector.
When Snowflake went public in 2020 it used a dual-class share structure that gave its CEO and insiders super-voting rights. However, Snowflake eliminated the dual-class structure in March 2021.
Snowflake had been based in San Mateo, Calif. Amid the shift to remote work spurred by the coronavirus emergency, Snowflake in May said it no longer has a corporate headquarters. It designated Bozeman, Mont., as its principal executive office, where Slootman and Scarpelli are based.
Snowflake Stock Fundamental Analysis
Meanwhile, second-quarter revenue jumped 83% to $497.2 million from a year earlier. Analysts had estimated Snowflake revenue at $467.5 million. Revenue rose 85% and 101% in the two previous quarters.
The company reported a 70-cent-a-share loss for the three months ended July 30, using generally accepted accounting principles, or GAAP. That compares with a loss of 64 cents per share a year earlier. Analysts polled by FactSet expected Snowflake to report a loss of 56 cents a share.
Second-quarter product revenue rose 83% to $466.3 million vs. estimates of $439 million.
In addition, Snowflake now has 246 customers with “trailing 12-month product revenue greater than $1 million,” the company said. That’s up from 206 such customers as of April 30.
Product revenue guidance for the October quarter met expectations. Snowflake forecast product revenue of $502.5 million at the midpoint of guidance. Analysts had expected $502 million.
SNOW Stock Technical Analysis
Snowflake stock went public on Sept. 16, 2020, at 120 a share. At the time, software growth stocks were hot as investors sought recurring revenue amid the coronavirus emergency.
SNOW stock popped as high as 319 on the first day of trading and closed 111.6% above the IPO price at 253.93. Shares pulled back as analysts debated Snowflake’s valuation.
Snowflake stock forged a cup-with-handle base over the next two months. The new base created an entry point of 301. SNOW stock blew past the buy point, hitting an all-time high of 429 on Dec. 8, 2020.
Is Snowflake Stock A Buy Right Now?
Currently, Snowflake stock owns a Relative Strength Rating of 34 out of a best-possible 99. The Relative Strength rating shows how a stock’s price performance stacks up against all other stocks over the last 52 weeks.
In addition, SNOW stock holds an IBD Composite Rating of 30 out of a best possible 99, according to IBD Stock Checkup. IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
Meanwhile, Snowflake stock has an Accumulation/Distribution Rating of D, according to IBD MarketSmith analysis. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as average.
As of Nov. 1, Snowflake stock has no valid entry point. SNOW stock needs to form a new base to be actionable.
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Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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