Warren Buffett's name comes to mind when it comes to generating extraordinary wealth from long-term investing. Buffett’s stock picks are closely tracked by investors as many of his investments have generated billions for the nonagenarian.
Buffett’s foray into technology stocks has been few. Snowflake Inc. (SNOW) has been one of his picks in the tech space. Although Buffett stays away from IPOs, his company Berkshire Hathaway bought $250 million of SNOW stock at the IPO price and later an additional 4.04 million from another shareholder at the debut price.
In the third quarter, SNOW’s revenue and EPS beat analyst estimates. Its revenue was 3.4% above the consensus estimate, and its EPS beat the analyst estimates by 141.9%. Its product revenue increased 67% year-over-year to $522.75 million. The company had 7,292 customers at the end of the third quarter.
SNOW’s Chairman and CEO Frank Slootman said, “During Q3, product revenue grew 67% year-over-year to $523 million. Our non-GAAP product gross margin came in at 75%, and we continue to drive strong growth at scale, coupled with strength in unit economics, operating profit, and free cash flow.”
SNOW expects its product revenue to come between $535 million to $540 million in the fourth quarter, below Street estimates of $553 million. For fiscal 2023, the data warehousing company expects product gross profit margins, operating income margins, and adjusted free cash flow to come in at 75%, 3%, and 21%, respectively.
Analyst Brian White has a neutral rating on the stock. He said, “Aside from any upside resulting from near-term guidance brinkmanship, we believe the trajectory of growth is on the ropes.”
SNOW’s stock has declined 59.3% in price year-to-date and 60.9% over the past year to close the last trading session at $137.76.
Here’s what could influence SNOW’s performance in the upcoming months:
Robust Financials
SNOW’s revenue increased 66.6% year-over-year to $557.03 million for the third quarter ended October 31, 2022. Its non-GAAP gross profit increased 67.9% year-over-year to $397.14 million. The company’s non-GAAP operating income increased 412% year-over-year to $43.37 million.
Also, its non-GAAP net income attributable to SNOW rose 256.2% year-over-year to $38.58 million. In addition, its non-GAAP EPS attributable to SNOW came in at $0.11, representing an increase of 267% year-over-year.
Favorable Analyst Estimates
Analysts expect SNOW’s EPS for fiscal 2023 and 2024 to increase significantly year-over-year to $0.22 and $0.52, respectively. Its revenue for fiscal 2023 and 2024 is expected to increase 68.2% and 47.6% year-over-year to $2.05 billion and $3.03 billion, respectively.
Stretched Valuation
In terms of forward EV/S, SNOW’s 19.35x is 710% higher than the 2.39x industry average. Likewise, its 21.60x forward P/S is 810.6% higher than the 2.37x industry average. Its 324.88x EV/EBITDA is significantly higher than the 12.12x industry average.
Weak Profitability
SNOW’s trailing-12-month net income margin is negative compared to the 3.25% industry average. Likewise, its trailing-12-month EBIT margin is negative compared to the 6.62% industry average. Furthermore, the stock’s 1.28% trailing-12-month Capex/S is 48.8% lower than the industry average of 2.50%.
POWR Ratings Reflect Bleak Prospects
SNOW has an overall D rating, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SNOW has a D grade for Value, in sync with its stretched valuation.
It has a D grade for Quality, consistent with its weak profitability.
SNOW is ranked #74 out of 79 stocks in the D-rated Technology – Services industry. Click here to access SNOW’s Growth, Momentum, Stability, and Sentiment ratings.
Bottom Line
SNOW is trading below its 50-day and 200-day moving averages of $150.05 and $163.08, respectively, indicating a downtrend. Moreover, SNOW is expected to face several near-term headwinds due to the weak macroeconomic environment.
Given its stretched valuation and weak profitability, it could be wise to avoid the stock now.
How Does Snowflake Inc. (SNOW) Stack up Against Its Peers?
SNOW has an overall POWR Rating of D, equating to a Sell rating. Therefore, one might want to consider investing in other Technology - Services stocks with an A (Strong Buy) or B (Buy) rating, such as Celestica Inc. (CLS), Box, Inc. (BOX), and NetScout Systems, Inc. (NTCT).
SNOW shares fell $0.76 (-0.55%) in premarket trading Wednesday. Year-to-date, SNOW has declined -59.47%, versus a -18.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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