Investment Alert: Buy Snowflake Under $140 Per Share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Snowflake is a rare pre-IPO company that won the approval of Warren Buffett. While it’s not fully known whether Buffett or his top lieutenants spotted the opportunity to buy this data services leader, one thing is for sure, the Oracle of Omaha signed off on it having a place in the prized Berkshire portfolio.
After the company went public, its share price soared towards $400 per share. But in the intervening period, a fast crash has occurred, and the share price has been hovering under $150 per share.
Following its 65% correction from the peak, is it a buy? Or will Snowflake continue falling?
- Snowflake is a cloud-based data storage and analytics company that offers a unique value proposition: it allows enterprise customers to view data across cloud platforms.
- Over 28% of the Forbes Global 2000 companies are customers, and Snowflake’s revenue is growing rapidly.
- Despite its losses, Snowflake is a good investment for the long-term. The company has a strong business model, a large and growing customer base, and a bright future.
Snowflake offers a unique value proposition because enterprise customers can, in one place, view data across cloud platforms, whether Microsoft, Alphabet or Amazon. For companies that need insights, Snowflake is a virtual must-have solution.
The evidence of how much customers love Snowflake is seen in a number of ways:
(1) Over 28% of the Forbes Global 2000 companies are customers.
(2) Revenues are growing like a weed:
- 2020: 173.9%
- 2021: 123.6%
- 2022: 106.0%
- 2023: 69.4%
(3) Snowflake’s Annual Net Revenue Retention Rate is an astonishing 173%; this is the revenue it can retain from customers from one period to the next.
So, the stars have lined up for Snowflake with revenues, customers, retention all pointing in the right direction, and a stamp of approval from the Sage of Omaha, what’s not to like?
In a word, valuation.
Snowflake is pretty fully valued at its current share price. We ran a discounted cash flow forecast analysis and calculated fair value at $139 per share. That suggests little upside from a valuation perspective.
Another fly in the ointment is the growing losses in operating income, which have amplified as follows:
- 2020: -$358 million
- 2021: -$543 million
- 2022: -$715 million
- 2023: -$837 million
Those losses are an eye sore but they’re not egregious as they relate to the balance sheet right now, which has almost $1 billion in cash and no debt on the books.
The tradeoff with Snowflake is obvious: amazing business versus poor valuation. On balance we think it’s a good opportunity to buy Snowflake for the long-term. As a public company this is the first time the valuation has dipped below our “fair value.”
As Buffett likes to say buying a great company at a fair price is preferable over buying a so-so company at a great price. The reason is that the upside on a so-so company is the gap between current valuation and intrinsic value, whereas a great company can grow and grow and grow. Think Apple, Alphabet, and Amazon that have virtually unconstrained market capitalizations. The bottom line is Snowflake has a lot more upside over the coming years, and should reward long-term investors handsomely.