We are upgrading Snowflake to OW due to its surge in our most recent CIO Survey and maintaining our $165 PT, which implies -30% upside from the close price. At $127, SNOW shares have sold off heavily from >$400 on November 16, 2021 (-68% decline to-date vs. -20% for S&P500 over the same period) and are now trading only slightly above their $120 IPO offering price back in September 2020. For reference, the company’s current revenue run-rate as of the latest quarter is -$1.7B vs. -$0.5B in the quarter preceding its IPO.
Snowflake enjoys excellent standing among customers as evident in our customer interviews (see here for 10 pages of proprietary detailed customer feedback in our initiation) and recently laid out a clear long-term vision at its Investor Day in Las Vegas toward cementing its position as a critical emerging platform layer of the enterprise software stack (see here for our note).
Notably, Snowflake’s standing surged to elite territory in our annual CIO Survey for 2022, which polled 142 CIOs controlling >$100B of IT spend, ranking #1 in installed base spending intentions and disproportionately #1 among emerging companies whose vision most impressed respondents.
Snowflake’s performance is highlighted in the tables shown below and included in our CIO Survey slide deck here. In addition, we are incrementally confident that Snowflake is reaching an inflection point in terms of material FCF generation, and we think that trendline has the potential to surprise positively, creating the initial framework toward FCF-based
valuation support. Net-net, we believe Snowflake is benefiting from demonstrable secular tailwinds illustrated quantitatively and qualitatively in our CIO Survey while also exhibiting an Elite Rule-of79 and positive cash flow for FY23 based on JPMe, setting up an attractive risk/reward dynamic, in our view.
Summary Investment Thesis and Valuation Snowflake, at its core, is a massively scalable, highly elastic, cloud-native data warehouse solution that has begun to disrupt the cloud data management space. Snowflake’s highly differentiated solution has pulled it into a wide variety of use cases from data engineering to data science, and its simplicity and compelling value proposition has led to its adoption ranging from one man operations up to Fortune 10 companies, allowing it to pursue a $67-87B current TAM.
Additionally, Snowflake’s cloud-agnostic multi-region solution, with intuitive and efficient data sharing capabilities, lays the foundation for a much broader vision of a new category called the Data Cloud, potentially leading to an open-ended market opportunity with strong inherent network effects. We expect Snowflake to continue to grow revenue at a rapid scale.
Despite our very favorable view of the technology and the company, our rating is Neutral as we think the risk/reward is fairly balanced at the current price levels, marking the steepest valuation we can recall in the software industry in the last couple of decades. Our $165 Dec-22 PT is based on-18x EV/CY23E revenue.
Snowflake Inc. (Overweight; Price Target: $165.00) Investment Thesis Snowflake, at its core, is a massively scalable, highly elastic, cloud-native data warehouse solution that has begun to disrupt the cloud data management space. Snowflake’s highly differentiated solution has pulled it into a wide variety of use cases from data engineering to data science, and its simplicity and compelling value proposition has led to its adoption ranging from one man operations up to Fortune 10 companies, allowing it to pursue a $67-87B current TAM.
Additionally, Snowflake’s cloud-agnostic multi-region solution, with intuitive and efficient data sharing capabilities, lays the foundation for a much broader vision of a new category called the Data Cloud, potentially leading to an open-ended market opportunity with strong inherent network effects. Snowflake’s broad-based appeal is underscored by its large, fast growing blue-chip customer base, while its existing customers continue to expand at a rapid pace as well, evidenced by the high dollar-based net retention rate for the last eight quarters.
The pent-up demand for its solutions has allowed Snowflake to exhibit a very rare level of growth at scale with best-in-class growthplus-margin profile. We expect Snowflake to continue to grow revenue at a rapid scale. We believe the combination of alignment to secular trends like data-growth and digital transformation, very rapid revenue growth at scale and a solid, efficient business model, makes Snowflake an exceptional asset among software companies.
Considering the large TAM, superb management team, and astounding trajectory, Snowflake could grow into and beyond the current valuation in future years.
