SNOW - Can Snowflake Out-Innovate Big Tech In The Race For Data Warehousing Supremacy?

2023-07-12 13:48:53 ET

Summary

• Snowflake, a cloud-native data management company, has over 7,800 customers and made $2.1 billion in revenue in fiscal 2023, despite operating at a significant net loss.
• The company's business model is centered around its cloud-native platform, a direct sales strategy, and a partnership strategy with large system integrators and specialized integrators.
• Despite facing stiff competition from tech giants and other private companies, Snowflake's continued investment in R&D and focus on customer needs could help maintain its growth trajectory.

Cloud-based data management has never been more alluring, and Snowflake ( SNOW ) is at the forefront of this exciting revolution. With its distinct architecture and highly scalable model, Snowflake is transforming how organizations handle massive amounts of data and analytics. This article takes a deep dive into the company's history, unique business model, and intense competition in the ever-evolving data warehousing landscape. Will Snowflake continue to break new ground, or will it succumb to the pressure from big tech giants in the race for market dominance? In this article, we express doubts and conclude with a Sell rating.

Business Introduction

Snowflake, a cloud-native data management company, was established in 2012 by Benoit Dageville, Thierry Cruanes, and Marcin ?ukowski. The company has been instrumental in revolutionizing the data warehouse industry with its unique architecture that leverages public cloud infrastructure. This architecture facilitates the separation and control of compute and storage resources, allowing for the consolidation and querying of massive amounts of data at scale. This innovation gives Snowflake a competitive edge by providing customers with greater scalability and flexibility than traditional on-premise data warehouse offerings.

Snowflake provides a cloud-based data platform that allows organizations to unite siloed data into a single source of truth. The company's product, also called Snowflake, is a cloud-native data platform built specifically for the public cloud. It aims to eliminate the friction that traditionally comes with collecting, processing, and analyzing data.

Snowflake's platform operates as a software-as-a-service built on top of cloud infrastructure providers like Amazon (AMZN) Web Services, Microsoft (MSFT) Azure, and Google (GOOG) (GOOGL) Cloud Platform. It separates storage from compute, allowing each to scale independently. This architecture optimizes performance and concurrency while minimizing cost. Snowflake also handles all of the infrastructure, management, tuning, and upgrades on behalf of customers.

The Snowflake platform aims to make data warehousing and data lakes more accessible. It allows organizations to leverage near-limitless computing capacity without having to manage infrastructure. This enables faster insights across diverse data types and workloads like analytics, data science, data sharing, and application development.

As of January 2023, the company has over 7,800 customers globally across industries like retail, media, financial services, and healthcare. Major customers include Capital One, NBCUniversal, Nielsen, and McKesson. The company has seen rapid growth, with revenue of $2.1 billion in fiscal 2023, up 69% from the previous year. However, Snowflake operates at a significant net loss, which totaled $797.5 million for fiscal 2023.

Business Model Analysis

Snowflake's business model is centered around its innovative cloud-native platform that allows customers to load, integrate, analyze, and securely share their data at scale. The company's strategy can be dissected into three core components: the consumption model, the sales strategy, and the partnership strategy.

The cornerstone of Snowflake's business model is its consumption model. The company charges customers based on the resources they use, providing a scalable, pay-as-you-go approach. This model has been particularly beneficial for Snowflake, evidenced by its net revenue retention rate of over 150%. The majority of the company's revenue comes from annual or multi-year capacity arrangements, indicating a strong recurring revenue stream. This consumption model reduces barriers to adoption for customers and incentivizes Snowflake to improve its platform's efficiency and performance continuously.

Snowflake's sales strategy primarily involves a direct sales team that focuses on acquiring new customers and upselling within existing accounts. The team targets large enterprises, leveraging Snowflake's cloud-native architecture and consumption model to appeal to organizations looking to scale their data workloads. Additionally, Snowflake utilizes a self-service model for smaller customers, creating an opportunity to convert these leads into full enterprise deals over time.

Lastly, Snowflake's partnership strategy is crucial to its overall business model. Although the company relies on direct sales for customer acquisition, it engages a network of partners for implementation services, integrations, and driving awareness. These partners range from large system integrators like Accenture ( ACN ) and Deloitte to specialized integrators focusing on specific technologies, regions, or industries. The partner network enables Snowflake to extend its reach and enhance its platform with valuable datasets, models, and applications.

Concern: Competition

Snowflake operates in the highly competitive cloud data market, where it faces stiff competition from established tech giants like Amazon Web Services, Microsoft Azure, and Google Cloud Platform, as well as well-funded private companies like Databricks. These companies are all vying for market share in the data warehousing and management space, leading to a rapid pace of innovation.

Unlike its competitors, Snowflake doesn't have the advantage of a large existing customer base to drive platform adoption. Therefore, it is crucial for Snowflake to stay at the cutting edge of innovation and continuously respond to customer needs. While Snowflake's separation of storage and compute resources was a unique feature, competitors have been quick to catch up.

Amazon Redshift , Google BigQuery , and Microsoft Synapse , the data warehouse solutions of the leading hyperscalers, have all introduced similar architectural approaches. Additionally, traditional data management firms like Teradata ( TDC ) and Oracle ( ORCL ) have launched cloud-native solutions, potentially benefiting from data interoperability between their on-premise and cloud systems.

Each of these competitors has also introduced various innovations along the data management pipeline. AWS has launched Data Exchange for Redshift, Microsoft has unveiled Azure Synapse Analytics , Google has introduced BigQuery Dataplex , and Databricks has launched its own marketplace . These innovations represent direct competition for Snowflake's platform, and the company must respond effectively to maintain its market position.

Despite the competitive landscape, Snowflake's continued investment in R&D and its focus on meeting customer needs could help it maintain its growth trajectory. However, the company will need to continuously innovate and differentiate its offerings to capture and retain a larger market share in this highly competitive environment. Snowflake's future success will largely depend on its ability to out-innovate its competitors and continually deliver superior value to its customers.

Financial & Valuation

Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.

Looking ahead, sell-side consensus forecasts steady revenue growth of 33.6% this fiscal year, reaching $2.8 billion, and a further 31.8% the following fiscal year to $3.6 billion. If SNOW can deliver on these projections, it would certainly be a positive sign. However, we can't ignore the fact that over the past three years, SNOW has spent a rather high proportion (45.6%) of its revenue on share-based compensation (SBC), which could impact its profitability.

Furthermore, the consensus anticipates the company's EBIT margin to expand by 60 basis points this fiscal year to 5.2%, and by an impressive 337 basis points the following fiscal year to 8.6%. However, this promising trend hides the fact that stock-based compensation is excluded. It's worth noting that the company's return on invested capital without adjusting earnings is currently negative (-14.6%).

Although the company is not profitable, SNOW certainly has a strong cash position, boasting net cash of $3,212 million.

In terms of stock performance, SNOW hasn't fared particularly well over the past year. It returned 9% less than the S&P 500, resulting in an absolute return of 6.2%. This is notable given how strong technology stocks have performed in the same period. The stock is currently trading at $172.05 per share, 11.0% above its 200-day moving average but 16% below its 52-week high of $205.66. The stock is also trading 44% above its 52-week low of $119.27 per share. Short interest is 4.9%, suggesting some skepticism among investors.

When we shift our gaze to valuation multiples, SNOW's valuation appears stretched. Using consensus estimates for next fiscal year's results (FY2), SNOW is trading at an EV/Sales multiple of 14.5, an EV/EBIT multiple of 169.3, a P/E multiple of 179.7, and a FCF multiple of 57.8. These figures place SNOW at a significant premium to the S&P 500, with the company's FY2 PEG ratio currently at 3.2, a whopping 112.4% premium to the S&P 500's PEG ratio of 1.5.

SNOW's rolling forward 12-month P/E ratio stands at 225.8, which is high, indicating that the stock is currently expensive. When compared to peers like DDOG and MDB, which are trading at a forward 12-month P/E of 76.2 and 220.6, respectively, SNOW's high valuation becomes even more apparent.

Conclusion

Snowflake's innovative approach to data management has undoubtedly disrupted the industry, but the road ahead is fraught with challenges. The company must navigate the increasingly competitive landscape and continuously differentiate itself from formidable rivals like Amazon, Microsoft, and Google. While Snowflake's strong focus on R&D and customer-centricity may give it an edge, the company's high valuation and ongoing net losses raise concerns about its long-term profitability.

Given the intensifying competition and the growth expectations needed to justify Snowflake's high valuation, we are skeptical of the company's ability to meet these expectations and turn profitable simultaneously. The company's future hinges on its capacity to stay ahead of the curve, refine its business model, and deliver exceptional value to customers. However, considering the current circumstances, we rate the stock as a sell. As the company continues to make waves in the world of data management, only time will tell if Snowflake can maintain its trailblazing status and become a dominant force in the rapidly evolving cloud data market.

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