Snowflake Shows Reports of the Cloud’s Death Are Exaggerated

Stock Market
  • Snowflake (SNOW) has lost half its value as investors abandon money-losing tech companies.
  • SNOW stock has positive operating cash flow and enough cash to get through a recession.
  • Speculators are waiting for their opportunity to pounce.
Snowflake symbol and logo at the company corporate headquarters in Silicon Valley. SNOW stock.

Source: Sundry Photography / Shutterstock

Snowflake (NASDAQ:SNOW), the data warehouse stock technically based in Montana, has lost half its value since the start of 2022.

But claims that no one wants money-losing tech stocks may be exaggerated. That’s because Snowflake remains an expensive stock. It opened May 6 at about $165/share, a market cap of $52 billion on 2021 revenue of $1.2 billion. That’s 43 times revenue for a company that’s losing $1 for every $2 it takes in.

What people have been buying with SNOW stock is growth. Snowflake’s revenue more than doubled last year, and the year before that, and the year before that. For the year ending in January 2019 Snowflake had revenue of $97 million. For the year ending this January it was $1.2 billion.

Ticker Company Price
SNOW Snowflake $155.15

Bottom Fishing With SNOW Stock

This means investors are looking for a bottom in SNOW stock, a buying opportunity.

Snowflake came to the public market in September 2020, which now seems a long time ago. The IPO priced at $120/share but the first trades were at $265, and it closed at $229. It’s now selling for 30% less than that initial price.

While Snowflake lost $680 million last year, it lost $539 million in the previous year. Bulls will note this means the ratio between revenue and loss declined. Margins are expanding, and customers are sticking around. Snowflake also has contracts assuring its revenue will keep climbing.

More important, Snowflake had positive operating cash flow last year, over $148 million worth. It also ended fiscal 2022 with $3.85 billion of cash and short term investments. The initial IPO raised $3.36 billion. Snowflake is not going under.

What You’re Buying

Snowflake offers data warehousing as a service, which it calls the Data Cloud.

That means it offers space for cloud storage, but also software to analyze data and gain insights from it. Its early rounds of financing were backed by Berkshire Hathaway (NYSE:BRK-A) and Salesforce.com (NYSE:CRM). Competitors include the cloud czars who control its storage like Amazon.Com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL), but also smaller companies like privately-held Databricks and Cloudera. Founders Thierry Cranes and Marcin Zukowski had previously been at Oracle (NASDAQ:ORCL).

Snowflake’s primary competitor is Amazon’s Redshift. Its holistic data architecture is said to be faster, handling petabytes of data at speed. Its business model is based on consumption, so customers pay only for what they use. The danger is customers can cut their Snowflake spending whenever they need to, so a real recession (as opposed to a stock market rout) could hit its results.

One other unit that deserves mentioning is Cryptonumerics, bought soon after the IPO. That puts Snowflake in the private database business.

The headquarters is only technically in Bozeman, Montana. This is a Silicon Valley company that chose to become homeless during the pandemic and now operates from wherever its officers happen to be. It is CEO Frank Slootman, who joined the company in 2019, a year before its IPO, who is in Bozeman.

The Bottom Line on Snow Stock

How long Snowflake stock stays down depends entirely on the wider stock market.

Snowflake has the capital and customers to keep going even in the face of a recession. The worst thing that could happen would be for one of the cloud czars to grab it, assuming the price keeps falling.

Analysts at Tipranks still like Snowflake, with 15 of 24 telling customers to buy it.  Goldman Sachs (NYSE:GS) also remains a fan, although its price target has been cut to $289.

No one knows where the bottom of the current market lies, or how low cloud stocks like Snowflake can fall. But at some point, growth will return and, if you hold your nerve and grab some Snowflake, you should come good.

On the date of publication, Dana Blankenhorn held long positions in AMZN, CRM, GOOGL and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.

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