Cloudflare Vs Snowflake Stock: Which Is Best?

The demand for Internet infrastructure stocks grows as global economic digitization gathers pace. Businesses migrate to the cloud, employees work from home, and big data becomes the new oil. 

Two companies at the cutting-edge of this cyberspace revolution are Cloudfare and Snowflake. Which is the best buy for investors? And what kind of risk profile does each of the stocks presents for shareholders?

Cloudflare Valuation Is Eye-Popping

Cloudflare, Inc. (NET) is probably best known as a DDoS protection and mitigation application, even though there are plenty more arrows in the company’s quiver.

The firm’s growth has been breathtaking since its IPO in 2019, with NET’s current share price already making the stock a multi-bagger for investors buying in at the time of its float.

As a specialist provider of web performance and security services, NET has benefited from some powerful secular tailwinds of late, as the company’s own growth is intricately tied in with that of the Internet’s own dominance of everyday life. This makes it easy to see why its revenues have scaled as more of the global economy and human activity shifts online. 

As a fast moving tech stock you might expect Cloudflare’s valuation to be high, but even so, NET’s metrics might make some people’s eye’s water. For instance, Cloudflare has a 4-figure forward Price-to-Cash Flow ratio of 2,078 – a figure so high as to be almost ridiculous. 

But what is it that investors see in the business to make them willing to pay such high premiums for the company? Ultimately, it’s NET’s unique opportunity in a vast market with an almost limitless supply of customers.

Indeed, Cloudflare has been putting new customers on its books at a compound annual growth rate of 25% the last four years, with a 124% dollar-based net retention rate (DNR) on those additions too. The company maintains its high DNR through strong up-selling efforts, new product introductions and the acquisition of large account clients.

Cloudflare Market Size Is Massive

Cloudflare’s total addressable market (TAM) keeps on expanding as the company increases its offerings in the edge computing, IoT, server-less and 5G sectors too. From a TAM of just $32 billion in 2018, the firm now expects that to rise to $100 billion over the next three years.

NET also has a geographically diversified global footprint, with only 52% of its revenue coming from the United States in the last quarter.

It recently partnered with JD.com to expand its reach in China, with an agreement that includes provision for JD to build and maintain 150 data centers in a number of Chinese cities, where NET’s software will support the operation and the profits from the undertaking being split between the two companies.

Shares in Cloudflare have gone up 265% in the last twelve months, largely on the back of a string of very good earnings and revenue reports, but also because Wall Street and the wider investing community are recognizing what an enticing prospect the company really is.

As with the firm’s Price-to-Cash Flow multiple mentioned earlier, its other financial and metrics are off the chart – NET’s Enterprise Value-to-EBITDA fraction, for example, is 951 – and as such don’t really make for any good analysis.

However, its high valuation isn’t without merit; NET has soaring revenue growth of 52% when compared to the Information Sector median of 13%, and its trailing twelve month Gross Profit Margin currently stands at a very enticing 77%.

The problem for Cloudflare right now is that its price premium, even if justified, is vulnerable to catalyst shock.

Any bad news for the firm could see its stock value drop disproportionately low, as the market takes its chance to pull back to a more reasonable level.

Negative publicity – which isn’t unheard of for Cloudfare: see the controversy over some of its former clients for proof of this – or a downturn in its rapid growth rates could each pose a risk.

And NET has yet to turn a profit, meaning that, for the foreseeable future at least, it’s extremely important the firm navigates these possible headwinds until its bottom-line is the positive.

Source: Unsplash

Snowflake Revenue Growth Is Astounding

Big data is getting bigger, and all modern enterprises engaged in any aspect of data aggregation and handling need somewhere to keep it. That’s where Snowflake Inc. (SNOW) comes in.

The Bozeman, Montana-based company is a pioneer in the idea of the data cloud, a networking solution that connects organizations with their data, making them better able to analyze and use that data all through a single platform.

The upside benefits of better data management promise huge opportunities for companies, but the scale of processing, storing and retrieving data is daunting.

Snowflake solves this problem for businesses by bringing together legacy point solutions such as data lakes, pipelines and warehouses, and giving the power to organizations to use and monetize that data efficiently.

Snowflake has seen its customer base explode on the strength of its offering this past quarter, growing its client list by 60% to almost 5,000, and delivering a net revenue retention rate of 169%.

Additionally, SNOW’s revenue has been increasing around 20% every quarter since Q2 2020, with revenue for the latest quarter of $254.6 million up 103% year-on-year.

Importantly for revenue growth, Snowflake’s large customer momentum – i.e. those customers with over $1 million of product revenue spend – is also rising significantly, up 107% year-on-year and 51% over the last two quarters.

Unlike Cloudflare’s share price which has been growing unrelentingly since its public launch a couple years ago, SNOW’s stock performance has been a little more mixed.

The company hit an all-time closing high of $387.70 in December 2020 after its own IPO in September of that year, but has since retraced to current levels of around $320.00 today.

The firm was actually trading as low as $188.24 in May, and has shown strong resilience to make up 70% to its present price.

But despite a good Second Quarter earnings card, SNOW’s management lowered its guidance for the full Fiscal Year 2022 by downgrading its predicted product revenue to the range of $1.06 billion -$1.07 billion against Wall Street consensus estimates of $1.12 billion.

SNOW Vs NET: Which Is Best?

Where Cloudflare is objectively overvalued, Snowflake is positively under-priced. Both companies are expensive when judged on conventional standards, but for the high-growth SaaS sector each has its own pros and cons. SNOW is certainly better with a Price-to-Sales multiple of 84, and beats NET’s revenue growth of 43% by more than double that at 92%.

However, Cloudflare has delivered better stock returns for investors over the course of its public life, whereas Snowflake’s volatility is a concern. That said, SNOW is steadily climbing its way out of a price trough at the same moment that NET might just be peaking – making the data warehousing play at better bet than the riskier Cloudflare at the present time.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.