SNOW - Snowflake: Material Growth Rate Inflection Hiding In Plain Sight

2023-08-31 05:32:58 ET

Summary

• Snowflake's recent earnings report beat expectations, but guidance reflected continued pressures on consumption/revenue growth.
• Snowflake's management believes there will be a growth inflection starting in early 2024, which is not resonating with some traders and analysts.
• The company's leaders emphasized the importance of data strategy and its role in facilitating the deployment of AI, positioning Snowflake as a key component in the AI ecosystem.
• Snowflake's future growth is likely to reflect the kind of demand displayed by Nvidia in its recent earnings report.
• Snowflake is releasing several other products, including those utilizing AI and container services, which are likely to further enhance growth.

Guidance vs. commentary-which do you believe

The market, it is said, is a hard mistress. Another aphorism says something to the effect that you can’t win for winning. Snowflake (SNOW), and its most recent share price action, might be seen as confirmation points. I have been both a Snowflake recommender and a Snowflake shareholder for some time now. Initially, after the company went public, its valuation was essentially untouchable, at least for me. Subsequently, its growth rate has contracted as macro headwinds have impacted the usage of its largest customers.

Snowflake reported the results of its most recent quarter on August 23 . The headlines for Snowflake describe a quarter that beat expectations, but with guidance reflecting continued pressures on consumption/revenue growth. The headlines are factually accurate, to be sure, but thematically off base. The fact is the company’s leaders laid out a growth inflection forecast that is clearly not resonating with some traders, and even with some analysts.

I confess in reading some reviews of the quarter and guidance by analysts who actually asked questions on the call, I thought I had been listening to voices emanating from a different company. The company’s leaders, Frank Slootman, CEO and Mike Scarpelli, CFO have occupied various leadership positions in the software industry for more than 20 years. Specifically, both men have been together at Data Domain, Service Now (NOW and this company. Their track record speaks for itself.

When they talk about the software space and AI, I listen. I don’t presume to know as much about the evolution of AI/Generative AI and its correlation with the results of NVIDIA ( NVDA ) as either man. Investors simply looking at Snowflake’s stock price since its earnings release, or even from reading much of the commentary I have seen, might not realize that Messer’s Slootman and Scarpelli did address those subjects quite clearly and positively. I don't want to pretend that some of what was said by these men was not intended as a commercial. They are obviously serial entrepreneurs, and as such hyping their own companies is in their DNA. But that said, over many years of following their commentary I have found it to be more factual than hype, and more farseeing than much else I hear or read.

Much of the balance of this article will present what actually was said on the Snowflake conference call- I think many readers will find this to be a voyage of discovery in that the conference call was both realistic and upbeat and suggested a likely growth inflection for Snowflake starting in early 2024. And neither Slootman nor Scarpelli really didn’t talk negatively about consumption, either.

While I do not much like catching falling knives, the dichotomy between what the management said, what guidance was published, a couple of reviews by covering analysts and how the shares have been moving is so significant as to call for some kind of recapitulation as to what management wanted to convey in its messaging during the call.

This is not intended to be a post about Nvidia’s share price, its results, or its outlook. But I think it will be enlightening to understand how the leaders of this company view the correlation between Nvidia and this company in terms of outlook. It is much more significant, I believe, than has recently been credited by most observers or investors. And because it is, the outlook for Snowflake’s growth is substantially greater than is embodied in the consensus or perhaps the conventional wisdom regarding the company and its valuation.

Nvidia’s earnings and the speech of the Fed Chairman seemed to have renewed a significant risk-off bias in the market at least for some time. Some of that was rolled back on Friday and Monday, but Snowflake shares had still been under some pressure. Snowflake shares wound up falling by 5% the day after its earnings release, and as of Monday’s close they haven’t recovered Overall the shares have fallen by about 16% over the last month noticeably greater than the fall of the WCLD ETF over the same span. At this point, SNOW shares are up just marginally since the start of the year despite a business outlook that is clearly much stronger, and which probably includes a positive growth inflection.

I think almost all readers have seen more articles and comments about AI than…well far more than might be useful in making choices for an IT portfolio meant to take advantage of this revolutionary trend. And it would be hard to ignore the stunning results coupled with the more than upbeat guidance offered by Nvidia when it recently reported its results. As a software analyst who has been writing about AI for literally years now, it would be surprising if I did not offer subscribers and readers my own picks for a future to be heavily influenced by the broad acceptance of AI.

There are many such companies to consider in the enterprise software space whose growth will be accelerated by the broad deployment of applications based on generative AI. It is rare to listen to a conference call from IT vendors that don’t focus on AI, often to the exclusion of much else about a particular company. I have no one particular undiscovered pick to share. Life rarely works that way. That said, one of my top AI picks is Snowflake, and my conviction was strongly reinforced by the company’s recent conference call in the wake of a recent analyst day that also spoke to some of the same themes.

Before proceeding, I acknowledge that Snowflake shares will not be for all readers. While it doesn’t have the valuation it enjoyed in 2021, the shares are hardly cheap either. And the shares are notoriously volatile, often rising or falling 5% or more during a day even with no news to animate the shares. I have recommended a smaller weighting for some readers than would otherwise be the case simply because of that volatility which can get stomachs churning. And it does use stock based compensation; the reported SBC level is relatively high. If any of these factors is a show stopper for a reader, then stop right here.

After adjusting my model to take account for the most recent results, the guidance and the commentary, my own projection of the forward EV/S ratio is less than 15X. I inevitably look at the combination of growth and profitability in considering valuation, and on that basis, the shares, while not cheap, have a less elevated valuation than some alternative high growth investments. I do consider dilution in my valuation analysis.

That said, I doubt very many investors are owning or buying Snowflake shares because they place much credence in current valuation metrics. I wouldn’t recommend the share at this price if I thought the most likely revenue growth rate for the company was the 31% which is the current published 1 ^st call consensus for the company’s revenue growth for its fiscal ’25 year (starts 1/31/24). And I probably wouldn’t recommend the shares even if I believed product revenue growth in the next fiscal year would be 41%.

I don’t, to be sure, believe that Snowflake’s percentage revenue growth is going to match that of Nvidia, not now, not next year, or at any other finite period. It is a software company that sells users multi-year agreements based on a consumption model and that will have a different growth cadence than a hardware company selling chips. But the message I got out of the Snowflake call is that growth estimates for this company are too low, that the software this company sells is a foundational technology for AI and as a result of that premise, growth will inflect much higher in FY’25 and beyond. That makes the argument about the current EV/S ratio moot, at least for me, and I have bought and will continue to buy more shares for the Ticker Target model portfolio and advise others to do the same.

Reviewing Snowflake’s number’s: they were pretty straightforward and probably not all that exciting

The results that Snowflake reported last week were probably what most investors and analysts had been anticipating. And so far as it goes, I doubt that its forecast was much of a surprise, either. Specifically, at the end of the prior quarter, the company had forecast that its Q2 product revenues would reach about $625 million, and it would have a non-GAAP operating margin of 2%. It also provided a full year forecast for product revenues of $2.6 billion with an operating margin forecast of 5% and an adjusted free cash flow margin forecast to be 26%

The actual results for the quarter showed product reveries of $640 million, about $15 million greater than the prior forecast, with a non-GAAP operating margin of 8%. The company maintained all of the guided metrics for the full year of FY’24, with product revenues forecast to be $2.6 billion, an adjusted operating margin forecast of 5% and an adjusted free cash flow margin of 26%. Not particularly exciting, and implying product revenue growth of about 28% in Q4.

Some of the details of the earnings presentation were probably a bit more encouraging. The company plans to continue to hire, albeit at a cadence that will only add 1000 employees this year. Its gross margin last quarter ticked up to 78%, and some of that represented slightly better pricing and operating efficiencies while a small component was a onetime credit for cloud hosting from one of its service providers.

Frankly, just looking at the specifics of the forecast would certainly not lead most observers to make a clarion call to purchase the shares. Snowflake, with an estimated EV/S of about 15X, is certainly not an exceptional value, although the combination of growth and free cash flow margin yields a less demanding valuation. But that is not why I chose to write this article at this time.

It seems to me that many commentators are missing the tenor of the conference call discussion which was as clear a signal as any that the company’s leaders are looking at a material growth inflection starting perhaps 6 months from now. There might be some who would maintain that it would be prudent to wait until that inflection is visible in reported numbers. My riposte would be that by the time reported numbers show an emphatic growth inflection, valuation for SNOW shares is likely to be very elevated. And there is very likely to be some visibility along the way-the company actually did see stronger than expected bookings even this past quarter and commented that August had been a very strong month for consumption/revenue.

Last week Nvidia reported what some have considered to be a miracle quarter and gave strong guidance. I do not cover Nvidia and don’t want to pose as some expert when it comes to the accomplishments of that company. For shareholders, and sadly that doesn’t include this writer, it’s been a marvelous journey. The inevitable question, though, in the wake of Nvidia’s results and outlook is are there analogs out there? Many investors have bet on Super Micro ( SMCI ) as a logical analog. And that has worked, or at least it worked until the latest SMCI guidance was found wanting by some.

I am going to suggest here that Snowflake shares ought to be considered as a read through from Nvidia’s results. Not as a one for one analog-SNOW is a software company with a consumption model and that doesn’t map precisely to a company selling chips, and certainly not on the same time scale, but with some lag. I want to make clear that while I obviously concur in the opinion, the evidence and the contention is being made by the Snowflake leadership.

Many, many people track Warren Buffet or Michael Burry when it comes to investing. I might suggest that the same kind of attention ought to be paid to the commentary and forecasts of Snowflake’s leadership, who have at least as attractive a track record in doing what they do, as do Messrs. Buffet and Berry when it comes to investing.

While I will present, as appropriate, my own interpretation of what was said on the conference call the other day, I have chosen to quote rather extensively from the transcript. It really is Snowflake management that should be listened to, more than those of us who try to interpret tea leaves and signposts from a 30k foot view.

Why should Nvidia’s business correlate with that of Snowflake

Again, I have no desire to explore the specifics of Nvidia’s quarter or its guidance. There is now some speculation that the upside in Nvidia’s demand has, in part, been a function of excess inventory buying, and that end-user demand for CPU’s to be used in AI applications is rising at a lower rate than Nvidia’s sales numbers. For the purpose of this analysis, that really doesn’t matter much.

Nvidia’s chips, or at least the ones used in building hardware for data centers, are being bought to facilitate the deployment of AI and generative AI apps. But there is not, obviously, a one for one correspondence between buying the chips, and deploying an AI app. AI is built on data. Large language models are animated by looking at lots and lots of data in order to be able to determine the appropriate correlations and ultimately the appropriate answers to complex queries. That is how business value can be created. The real question here is how users can obtain business value and solve business problems using AI. There is a hardware layer, and that is being procured using Nvidia chips as a part of a foundation. But then there has to be an infrastructure layer, and that is where Snowflake becomes a key component of the solution.

I think as an analyst, the why is really more important than the what. If one understands the why, than ultimately, the what will become highly likely to ensue, and that is why I have chosen to include such an extensive selection from the Snowflake conference call at this point in the article.

Brent Bracelin

Thank you. I wanted to go back to the discussion around the increase we're seeing in model training capacity. Clearly, billions of incremental dollars going into NVIDIA GPUs here. You need data to train the models. I appreciate there's going to be a lag relative to when the spend hits the data layer. But are there any technical hurdles that need to be overcome? Or you do you think this cycle is different and that there are other considerations as well? Just thinking through that -- the investment we're seeing right now in infrastructure and thinking through what are the other factors we need to think about before it starts to impact the data layer? Thanks.

Frank Slootman

I'll start, and then maybe Christian can follow, even think about the question while I'm talking. You can't characterize as AI as one thing, right, because you see the things that people are doing with unstructured data and the whole notion of copilots and the systems and tutors and all that, it's very much focused on contextual data. And we see action with support call records, contact centers and so on. But again, you look at Snowflake, who sits on mountains of structured proprietary enterprise data, that's a different realm for AI than the very text model-oriented type of inquiry.

And I have to say that just from all my conversation with customers, I mean people are behind, I would say, the textual side [Technical Difficulty] proprietary data, how we're going to approach that. We view that as our business, and we're driving that very hard, and hence the emphasis on getting your data [indiscernible] in order because you just cannot unleash large language model and hope for the best, because of all the issues that we've mentioned before around governance and just understanding of what kind of data we are generating in the process.

That's why I said the early going, you're going to see a lot of upside from [indiscernible] that analysts are going to be able to generate data far quicker, far better than they ever have been before. And we're really massively reducing the skill sophistication requirements to be able to do that. Data in and of itself is going to be a big driver for us.

Christian Kleinerman

Yes. Christian here. I would add maybe two areas in addition to what Frank mentioned. The first one is around having the right data to be fed into these models. Frank started the call with no AI strategy without data strategy. And it is very pleasing that the results of traditional ML or Gen AI is a function of having the right data, the right data quality, the right metrics. The technology will be as good as the data that is fed into. All of the investments that we make on data quality and cleansing and pipelines, all of that is very important.

The other piece that I think will be a technical imperative for everyone doing AI and Gen AI is around the measurement and feedback how good are the solutions, how do I know if there are potential buyers into the data or are there gaps in their understanding and performance of the model. Those two are inherent parts of the lifecycle and [interestingly, they all run to] ((PH)) having a great data foundation enabled service.

It is simply not possible to get business value out of generative AI without using some kind of software to facilitate data storage and to manage data efficiently. I realize that many, perhaps most readers want to evaluate some specific forecast for Snowflake when making an investment decision. That being said, taking the numbers as presented in the forecast, and the consensus revenue growth forecast for next year, without considering context is going to lead to a seriously inaccurate conclusion.

Many of the buyers of Nvidia’s datacenter chips are preparing for a future in which AI becomes central in the operation of their own business. But it seems fairly straightforward to suggest that without a data strategy, and specifically a data strategy enabled by Snowflake, particularly, it will be impossible to derive business value from the deployment of AI.

When does this future become visible? That was also on the minds of many on the conference call, and the management did attempt to answer that question as well.

But clearly, like AI spend is hitting the silicon layer. I mean a question I get from investors is when will AI spend more clearly hit the software layer? I mean, do you have any thoughts on that?

Mike Scarpelli

I think it's going to be next year. As I said, it's going to take some time for AI. And people are still struggling to get GPUs and there is a time lag between when a chip manufacturer sells their chips to it gets built into the hardware that actually gets deployed in a rack in a data center, and it gets deployed to customers.

Frank Slootman

I think you will see the leading actually happening in months to come. But the material impact, I think most analysts out there are seeing in 2024 and we tend to agree with that.

Mike Scarpelli

And I would say in my prior life, when we were buying racks of servers, there's a six-month delay between when we bought them and when they were actually going into production. And I don't see that any different with GPUs.

No doubt some readers would like to see some more substantiation than opinions. And in fact in considering all that was said on this call, there was more than a bit of substantiation, and that will be discussed in the next section. Do note however Mr. Slootman’s comments about the months ahead-there will be some signs visible, particularly with regards to booking that can be discerned before a major consumption inflection.

Green shoots and more: Snowflake’s quarter was much better underneath the headlines than seems to be appreciated.

As mentioned earlier, the headline metrics for Snowflake were pretty much in line. No excitement, no upside, really very little about which to be excited. But that doesn’t mean some things for the company weren’t noticeably stronger than had been anticipated. In fact, thing such as bookings, customer engagement, optimization, and even usage showed some favorable trends that somehow have been ignored and have gone unremarked for the most part.

I might say that similar to the earnings report of Datadog, investors chose to focus on headline numbers at the expense of a focus on bookings.

Michael Turrin

Hey, great. Thanks. Appreciate taking the question. I think one of the comments mentioned new bookings outperformed expectations. I appreciate you're still seeing room for improvement, but anything you can add around what drove the improvement versus last quarter? It sounded like healthcare from the prior commentary, but wondering if some of that or certain product releases maybe also contributed there.

Mike Scarpelli

Yes. Hard to say whether -- I don't think it was a product release. I would say we saw some nice renewals from customers with growth. We also saw two very large Cap Ones , one large one in Europe, which was -- Cap One is an initial deal, it was a $22 million TCV deal in an insurance industry, and we saw a large gaming company in Korea commit to $9.5 million as a Cap One. So clearly, our message is getting across to these customers, and they see what we're doing and a lot of these want to do more in the area of AI. But first, they need to get their data into Snowflake and it's going to be a journey for these people. It's not going to happen overnight AI for our customers. (CapOne is a subsidiary of CapitalOne bank, and a system integrator that uses Snowflake as a key component of its solution.)

Mike Scarpelli

I actually think it's both, but I definitely think the fact that we kind of saw customers more reengaging with us in July on contracts and that continues into this quarter, I think it is easing a little bit at the top level in terms of approvals for customers and they're willing to commit. But it takes time to convert that to consumption. With that said, consumption is good. It was really good today as an example. But it's only one data point. We want to see more days of that before we think the -- we're into a real recovery. I think stabilization is the right term. We're not seeing customers reduce their consumption right now.

One misconception that was addressed on this call was that of the ability to deploy AI without a data strategy. While AI is a revolution, it can't happen overnight because so much else has to happen before a company can start to derive business value. That is why there is a lag between the performance of Nvidia, for example, and the likely future performance of Snowflake.

Kirk Materne

Okay. And then Frank, just as you spoke to a lot of executives at Summit, do they recognize the fact that the road to AI does require perhaps a heavier level of investment than they were thinking 12 months ago? How do you think that factors into sort of their thinking on budgets as we go into '24? Thanks.

Frank Slootman

Yes. The reality is, they don't really know yet, in any real definitive terms, what this is going to take. I mean I think a lot of people, I think this is correct, they have characterized their foray into language models as experimental exploratory and sort of trying to get their arms around how big a breadth box is this. So it's going to take a while before we get a real read of what the level of investment is. There are people who are going to -- stomach to do this.

I mean one of the challenges -- one of the great things about search historically has been that search, also had a very potent business model that go with it to pay for it and we cannot sort of unleash AI and have no business model that pay for, and people will get tired of that really, really quick. So these are -- GPUs from NVIDIA, they aren't cheap, as powerful as they are. So, we all have to bring that into alignment and into focus and have a sensible go-forward strategy.

So, a lot of the use cases we'll focus on, what are we getting for this, right? This is not just fun and games and planning your next trip to Yellowstone. People are going to be asking very, very hard-hitting questions, "What is this doing for us?"

The company really did call out a change in sentiment, although it did not reflect this change of sentiment in its forward guidance. Forward guidance was meant to be cautious, and the commentary as shown here is meant to show the current state of demand for Snowflake in the enterprise.

Tyler Radke

Yes, thanks for taking the question. First question just on the commentary around some of the projects you are starting to see better momentum there, particularly in July. I was wondering if you could just comment on the nature of those projects. Are they larger deals than you typically see or maybe they include more Generative AI or data science given all the new products that you released? If you could just kind of contrast the pickup and kind of where that's coming from?

Frank Slootman

Yeah, just -- you want to get going?

Mike Scarpelli

You, go ahead, Frank.

Frank Slootman

So, you shouldn't equate projects with deals, okay, because there is tons and tons of projects going on and projects relate to use cases and workloads and applications. But what we said in the prepared remarks is, we've really seen a sort of a sentiment change from the earlier quarters where people were sort of trying to cut off their limbs to fit within budgetary constraints and all these kinds of stuff. And then where do -- and that's why you see unnatural acts to save money. That has really subsided considerably and the conversation is really going back to where it historically has been, as you know, we want to do these applications, these workloads, these migrations. And of course, we're pushing the boundaries on much more sophisticated use cases in machine learning. And obviously, people want to understand how do I deploy large language models on the Snowflake platform. And we have outlined that an excruciating detail and demonstrated, showcased how we are doing that and we're super excited about how that's unfolding for us and our customers.

Michael Turrin

I like and appreciate those large deal stats. Maybe just quickly on the back half. If you can just help level set what's embedded in the rest of the year outlook? You've seen multiple comments around stabilization. Is that fairly consistent with what informs the outlook and maybe just any refresh on second half seasonality as expected? Thank you.

Mike Scarpelli

Well, Q4 is usually one of our largest bookings quarter and it's shaping up, but that's not necessarily consumption. And -- but the sentiment within our sales team has definitely shifted from where it was in the first half of the year.

New bookings exceeded expectations, renewals were strong with some significant upsell activity and some renewals were being executed prior to the end of the term. The management of this company has made the point on multiple conference calls that booking precede revenue by at least 6 months and sometimes as much as a year for large customers. The company does not provide a bookings metric that can be calculated through a disclosure of ARR. The company does provide RPO data which is not the same thing, obviously, but the growth of RPO which of 30% showed some stability as opposed to declining noticeably. For some time now, the company executives have commented about cloud optimization and how customers were focused on managing down usage rather than looking at new use cases and expansions. On this call, however, management called out an inflection in customer engagement and even called out the potential that usage had seen an inflection.

Mike Scarpelli

Well, as I said, August is shaping up very good. I called out yesterday, it was actually a very good consumption, but one day doesn't make a trend. Q4 is definitely seasonality with the holidays with Thanksgiving in the U.S. and the Christmas holidays that does impact daily consumption. From a bookings perspective, Q4 though, is clearly our largest bookings.

While I really wouldn’t base anything on a single day’s consumption data, the fact that August is shaping up to have had very good consumption seems to have been ignored. I think investors in this situation are looking to have their cake, eat their cake and to be served a glass of Chateau d’Yquem at that the same time. That might happen in a few restaurants; it wasn’t the message here. It is really not terribly surprising that Snowflake management is being conservative on forecasting a consumption inflection. My experience with Slootman and Scarpelli is that their inclination is always to under promise and over deliver.

What else is going on at Snowflake?

I have spent a lot of space in this article writing about analogs between Snowflake and Nvidia, and letting the commentary of the management of Snowflake speak to the requirement for organized data to be part of the foundation of any large scale deployment of AI within an enterprise. But there are actually other developments of note-perhaps not of the potential scope of AI and the correlation in terms of demand between Snowflake and Nvidia, but certainly key parts of the product strategy that should lead to growth acceleration over the next several quarters.

I do think there are some additional comments from the call that might be considered in evaluating the likely growth forecast for this company. In particular, the company is now offering what it calls Document AI which is a search technology for documents. And the company is starting to offer container services . Both of these products are now in private preview; both of these have the potential to move the needle when it comes to bookings growth, and eventually with regards to consumption.

The company recently announced a major increase in its commitment with Microsoft ( MSFT ). Microsoft can be both a competitor as well as a partner with Snowflake; it does offer database services on Azure. But the expansion of this partnership will probably bring focus and commitment to a go-to-market motion that embodies both Azure as a cloud environment and Snowflake as a data repository. These partnerships are often more hype than substance but the CEO called this one out and acknowledged that the key to its success was at the tactical level and would be based on specific initiatives to incent the two salesforces to work together on transactions.

For some time now, a criticism of Snowflake technology has been its lack of a good onramp for developers. Starting next year, the company is making the technology of its Streamlit acquisition generally available. I expect this has the potential to move the revenue growth need to some degree in FY’25.

As I mentioned earlier in this article, I would not be strongly recommending Snowflake shares if I thought the consensus revenue growth estimates for FY’25 were even reasonably possible. There are simply too many positive developments that should positively impact growth for me to reach that conclusion. While the macro environment remains less than ideal, the focus on cloud optimization and consumption that has been constraining growth is waning both as a function of new product introductions, partnerships and the influence of AI on consumption patterns.

Wrapping Up-Why Snowflake’s valuation shouldn’t scare investors

As I wrote at the start of this article, Snowflake has one of the highest EV/S ratios of any IT vendor at this time. Some readers will reject a commitment in the shares just based on that metric. I have suggested a few things in mitigation in this article. I haven’t focused on it, but Snowflake’s profitability has been rising significantly-it did have a significant beat in terms of operating margin last quarter. I am not going to review the various cost ratios in detail, but it is worth noting that through the first half of the fiscal year, the company’s free cash generation rose by 55%, and its free cash flow margin for the period was 28%. I have also not focused on competition in this space; I do think it worth noting that Snowflake’s most direct competitor, Databricks is said to be trying to raise additional capita l at a valuation of $43 billion, actually a bit higher than the valuation it was able to achieve when it last raised capital. By comparison, Snowflake, which is more than twice the size in terms of revenue, is profitable, and generating cash, has an enterprise value of $49 billion. Databricks is currently losing about $300 million/year, while Snowflake is expected to earn close to $200 million.

Snowflake uses stock based compensation. Last quarter SBC was 44% of revenue compared to 42% of revenue the prior year and to 42% of revenues the prior quarter. Yes, that is high, but again those kinds of numbers are derived from a formula to calculate SBC that some might challenge. I account for SBC through the average share count. The company is forecasting its full year average weighted shares will be 362 million, as compared to 327 million average shares at the end of Q2, and 324 million average shares at the end of Q1. I use 369 million shares in my valuation calculation which is based on 4Q forward estimates. As mentioned previously, my estimate of the company’s EV/S ratio is just less than 15X.

I have mentioned many reasons why I believe the current EV/S calculation is likely not to be too relevant. I think the company laid out a persuasive case with regards to the probability of a consumption inflection starting next year. Indeed, there are some signs that consumption growth is already accelerating, or at least that is has done so in August.

I think that the company management laid out a case as to why Snowflake or a data cloud alternative has to be part of any successful AI enterprise deployment. And I think that the company is in the process of releasing a substantial bevy of significant new products that will impact bookings, and ultimately consumption.

I don’t want to pretend prescience. I have made a judgement in my valuation model that Snowflake will achieve a 3 year CAGR of 51%. There is no way I can precisely quantify the consumption inflection or determine its magnitude. I do believe there is a good case to be made that Snowflakes growth will, at least directionally, map the recent growth of Nvidia, although for sure not on any one for one basis.

The macro economy remains more than a bit murky. Today, data is suggesting that job growth is likely to be weakening and the consumer confidence data probably suggests that consumers are pulling back from spending. Are those kinds of macro headwinds correlated with Snowflake growth? I would assert that Snowflake growth has already gone through a significant recession, and that the deployment of AI is a unique phenomenon that is probably not overly dependent on macro headwinds.

Snowflake shares have had a history of volatility. Some readers may determine that the level of volatility ought to limit their weighting in the shares. I have personally followed that strategy thus far, but the opportunity that I see is such that I may overcome my fear of the volatility of these shares.

Snowflake shares are certainly susceptible to changes in sentiment and risk tolerance. That accounts for much of the share price action on a given day. If interest rates decline, and risk-on sentiment returns, Snowflake shares are a good place to be.

I think the shares represent better value now than at any time in the recent past, mainly because of the likely growth inflection, but also because of the company’s strong free cash flow performance. I believe the shares will provide significant positive alpha over the coming year, and likely beyond.

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