Snowflake
The major narrative driving its share price is whether Snowflake can maintain its growth rate to justify its valuation and high multiples. Currently, the stock has a valuation of $92 billion and a price to sales ratio of 129. This is a reflection of the company's long-term potential, high growth rates, and juicy margins given that it is one of the leading data analytics companies.
Inside the Numbers
Snowflake's second-quarter earnings are certainly encouraging for the bulls as there were no signs of deceleration which was evident in many of the fastest-growing tech stocks of 2020. The company reported a loss of $0.67 per share which was significantly larger than analysts' expectations of a $0.15 per share loss. Revenue came in higher than expected at $272 million, which was more than a 100% increase from last year's Q2 revenue. Analysts were looking for $256 million. It also means the company's annual run-rate is now over $1 billion and would be the quickest company to ever achieve this figure in history.
Still, many value investors would scratch their heads at a $90 billion valuation and $1 billion in revenue. However, it makes more sense when considering that Snowflake's net revenue retention is 169%. Basically, once companies start using Snowflake's product, they are locked in and likely to increase spending over time as the company charges on a per-use basis.
The number of companies spending more than a million dollars on its platform also grew by 116%. It also saw a 60% increase in total customers, reaching nearly 5,000. Additionally, 212 companies out of the Fortune 500 are Snowflake customers.
Another factor adding to Snowflake's appeal is that the business can be scaled higher with minimal additional expense. This is quite unique and makes the business more attractive. Thus, Snowflake's margins will expand as it grows. Over the past year, margins increased from 63% to 73%.
Stock Price Outlook
It's indisputable that Snowflake is an impressive and rapidly growing business. What is up for debate is how much of this is reflected in Snowflake's stock price and how much growth and margin expansion it needs to deliver to keep pushing its stock price higher.
It's quite obvious that data analytics is going to be a trillion-dollar+ industry and that Snowflake is the leading company in this space. Therefore, investors should look to buy on weakness especially if it can maintain this momentum.
