We're Buying a Really Expensive Stock This Week
I don't think there'll be much disagreement in the CommonStock community about Snowflake $SNOW being a high quality company that's offering something the business world loves. But a lot of people (rightfully so) believe it's over-valued.

Well, it was my week to pick. And I focus on anti-fragility over valuation. Here's why it landed at the top of my list.

Image upload
For those unfamiliar, Snowflake allows you to take all of the data you've collected, and turn it into actionable insights via queries and processes.

Image upload
Ever seen a dollar-based net retention that high? Us neither. This is usage-based. Think of it like going to an amusement park with carnival rides. You pay a fee to the ticket booth, and then give the tickets when you ride on the ride.

Same idea here, only you're running queries on your data instead of going on a ride. It's easy to ride a bunch of rides once you see how fun (queries = helpful) they are.

Image upload

The switching costs are somewhat self-explanatory given the DBNR. The network effect comes from industries where data sharing is important. You can sell and share your data with other companies -- so long as you're all Snowflake customers.
Image upload

Image upload


Image upload


Image upload


Image upload

Competition is definitely high. And dilution remains high even a year after the IPO. If the employees keep delivering for customers, it's worth it. But if they don't, it could become a problem. And the valuation...
Image upload

Here's where we think Snowflake is in its growth cycle
Image upload
That means P/S and maybe P/GP are the best valuation measures (though I don't personally concern myself too much with this).

As you can see, at 33X sales, it's the cheapest its ever been....and still considered CRAZY expensive.
Image upload

The company scores very high on both of our frameworks.
Image upload
But what do YOU think? Let us know in the comments below!
In five years, you'll realize
73%$SNOW was worth the valuation
26%You overpaid by a TON
69 VotesPoll ended on: 09/16/22
Conor's avatar
Whether or not it's currently over-valued is entirely dependent on the future. I would argue now that Snowflake is dominating the multi-cloud market, it is probably undervalued.

However, with competitors such as Amazon, Microsoft, and Google, the question is whether they will adopt a multi-cloud strategy in direct competition with Snow.

There is a good argument that this will not happen which would make $SNOW a solid investment at current prices. With any position, the best way to limit risk is by not putting all of your money into an idea but slowly adding to it as the thesis remains on track.

I feel comfortable allocating a small percentage to my portfolio at the current price, but I also know the future is unknown.
Beaver Capital's avatar
@conorvalue well said Conor.
Eric Messenger's avatar
My golden rule is to avoid companies that aren’t profitable. But $200 sure looks better than $400. Personally, I can’t imagine paying this price when Google and Microsoft are in the same ball park price wise and rake in billions quarterly.

I’m watching and learning the growth thing here with you all though😉still trying to learn how to analyze numbers of these companies that aren’t yet profitable.
Brian Bailey's avatar
Appreciate all of the analysis Brian! I’m a big fan of all of the 2 Brian’s work from the past couple years. I’ve added to my SNOW position recently as well. I feel very confident in the company long term, and as David Gardner has expressed previously, the best companies are usually always considered overvalued along the way to market beating returns for years to come.

Author

Related