The Bull Case For Snowflake

The transition to digital is well underway. Massive amounts of data are already stored in the cloud, and everything from cars to dishwashers are connected through the Internet of Things (IoT). However, this is just the beginning of what will eventually be a fully integrated digital world, and technology companies are scrambling for position as leaders of tomorrow’s digital experience. 

Snowflake (SNOW), a relative newcomer, has taken on one of the biggest headaches faced by large organizations. These organizations know it is now possible to gather extraordinary amounts of valuable data, but organizing, analyzing, and retrieving it is a challenge. Often, data is divided among a variety of visualization applications. Because the applications are produced by different vendors, they can’t “talk” to each other, adding complexity to data-driven decision-making. 

Snowflake Simplifies Big Data

Snowflake has succeeded in simplifying and streamlining data management. The platform pulls business data into a centralized location, then feeds it out to third-party data visualization apps as needed. 

Since its September 2020 IPO, Snowflake has gotten a lot of attention – some of it from unexpected sources. Berkshire Hathaway, the holding company run by investing genius Warren Buffett, put hundreds of millions into Snowflake stock almost immediately. That’s a departure from Berkshire Hathaway’s history. The company is known for staying away from trendy IPOs – particularly in the technology sector.

It’s been almost a year since Snowflake went public, and share prices have gone as high as $429.00 and as low as $184.71 during that period. Overall, as of late August 2021, Snowflake stock has delivered more than 27 percent growth, and Berkshire Hathaway has retained its stake in the company.

Through June 30, 2021, Berkshire Hathaway owned 6,125,376 shares of Snowflake – an amount that makes up more than two percent of the conglomerate’s total portfolio. 

Is Warren Buffett right to bet on Snowflake? And is Snowflake still a buy? According to the company’s fiscal second-quarter 2022 earnings report, the bull case for Snowflake remains strong. 

The Bull Case for Snowflake: The Numbers 

Snowflake announced its fiscal second-quarter 2022 results on August 25, 2021, for the period ending June 30, 2021. In short, the company continued its rapid growth. Second-quarter product revenues came in at $255 million, which represents year-over-year growth of 103 percent.

Much of the increase was driven by clients in the financial services industry. Other strong contributors to Snowflake’s revenue included clients in the healthcare and technology sectors. 

It seems that once clients sign on with Snowflake, they don’t consider giving up the service. For the fiscal second quarter of 2022, Snowflake saw a net revenue retention rate of 169 percent, an astonishing figure. The company is working on developing and securing multi-year contracts with many of these clients in an effort to further strengthen retention.  

Expanding outside of the United States has been and will continue to be a priority for Snowflake. Revenue from clients in Europe, the Middle East, Africa, and the Asia-Pacific region grew more quickly than Snowflake’s growth as a whole.

In Europe, the Middle East, and Africa, total revenue growth was 185 percent year-over-year, and the increase in the Asia-Pacific region was 170 percent year-over-year. 

While Snowflake has not yet claimed the world’s largest organizations as clients, it is focused on building these relationships in the coming months and years. Specifically, Snowflake is courting the companies of the Fortune 500.

Its current total is 212 of that group, which includes 18 new additions during the most recent quarter. Meanwhile, in the quarter ended June 30, 2021, Snowflake added 458 net new customers, as compared to 397 for the same period the previous year. 

Profitability is looking promising as well, now that Snowflake has been better able to optimize for efficiencies. Product gross margin came in at 73.6 percent (non-GAAP), which represents an increase of 140 basis points quarter-over-quarter

Snowflake’s Strategy for Deepening Customer Relationships

Aside from the unique nature of its service, Snowflake sets itself apart through sector-specific product customization. As Chairman and CEO Frank Slootman explained during the August 25th earnings call, the focus on vertical industries is inspiring deeper discussions with current and prospective customers worldwide. 

Today, Snowflake’s work is centered around nine sectors:

  • media and entertainment,
  • financial services,
  • advertising,
  • healthcare and life sciences,
  • technology,
  • retail and
  • consumer packaged goods (CPG),
  • education,
  • public sector, and
  • manufacturing.

However, that doesn’t mean Snowflake is limited to those sectors. Ultimately, Snowflake infrastructure can benefit any organization – particularly those interested in leveraging the technological advances that are transforming the nature of business. 

Slootman explained that Snowflake isn’t simply replacing legacy data warehouse architectures with an alternative, and growth isn’t only the result of new types of companies like Coinbase (COIN) and Instacart. As Slootman put it: 

What Snowflake does is what we call enabling the demand. In other words, we’re not creating it, we’re allowing it to happen. So, there’s a lot of latent bottled-up, pent-up demand that has literally grown over literally decades where people have — because of fixed capacity limits on storage, on computational, or contractual limitations – they have not been able to do what the technology is now capable of doing.

Snowflake has given companies of every size the ability to access the true capabilities of today’s technology – the speed, power, and performance that simply didn’t exist years ago. That means Snowflake is seeing growth associated with the initial transfer of workload from clients’ existing infrastructure to the Snowflake platform, as well as the growth that comes with expanding, innovating, and pushing the limits of what is possible. 

What’s Next for Snowflake? 

Management is optimistic about fiscal third-quarter 2022 revenues. During the August 25th earnings call, Chief Financial Officer Mike Scarpelli indicated that product revenues are expected to come in between $280 million and $285 million for the next quarter. If Snowflake hits that target, it will represent year-over-year growth of 89 percent to 92 percent. 

Full-year guidance for fiscal 2022 is equally as optimistic. Scarpelli stated that product revenues should total between $1.06 billion and $1.07 billion. If that guidance is accurate, Snowflake will achieve year-over-year growth of 91 percent to 93 percent. 

The Bull Case for Snowflake: The Bottom Line

Snowflake’s high-profile investors and distinguished client lists have many analysts convinced that SNOW stock is a buy. The most optimistic of the group suggests share prices could go as high as $515.00 in the next 12 months, though that is a minority opinion. 

Overall, there is good reason to believe that Snowflake’s growth will continue as it collects more clients from the Fortune 500 list. That means greater revenue, eventual profits, and ultimately, strong returns for those who invest today. 

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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.