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Buy the Dip: Snowflake $SNOW
Bear with me for a second and pretend that you didn't see my Buy the Dip company of choice in the post title. Close your eyes (don't actually) and imagine that there's a mystery company with the following attributes:
  • Owned by Warren Buffett
  • World-class 174% dollar-based net revenue retention rate
  • Product revenue growing at 106% YoY
  • Estimated CY26 TAM of $248B by Gartner
  • Direct exposure to Cloud, Cybersecurity, Data Science, Machine Learning, and Application Development all in one platform
  • Net Promoter Score (NPS) of 68, more than 3x the industry average of 21
  • Down 63% from ATH
Ok, you can open your eyes now. This company is real, and is the picture perfect definition of a Buy the Dip opportunity, all the way down from the post-IPO frenzy price of $450 to $147 a share ($47B market cap). In this post for @commonstock I'm going to cover what exactly Snowflake does, why the Data Cloud is here to stay, why sub-$50B is an enticing valuation for the company, and investment risks.
What is Snowflake?
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Courtesy of Snowflake
Founded in 2012 and launched in 2014 by former data architects at Oracle, Snowflake offers their Data Cloud platform as Software-as-a-Service (SaaS). The Data Cloud is essentially a cloud-native Enterprise Data Warehouse (EDW) built to to take advantage of public cloud infrastructure, which it runs on top of, in order to leverage the scalability, performance, and affordability that Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform (GCP) have to offer.
AWS, Azure, and GCP have their own data warehouse services in Redshift, Synapse, and BigQuery, but these services can only be hosted on their respective public cloud. Snowflake offers a platform that can not only run on, but interact with multiple clouds.
To expand on Snowflake's capabilities, the Data Cloud has evolved to be much, much more than just an EDW over the last 10 years. Structured data resides in the data warehouse, unstructured data lives in the data lake, and the newly announced Unistore allows companies to utilize transactional data using hybrid tables. Basically, Snowflake can now handle every single type of data on their platform, breaking down traditional siloes and opening up potential opportunities to analyze both transactional and analytical data together using one platform.
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Courtesy of Snowflake
If you're familiar with data, you know that data is useless without a purpose. That's why Snowflake is enabling mission-critical workloads, many of them being announced at their recent Investor Day, to run on top of the Data Cloud. Here are just a few of them:
  • Application Development, via the recent acquisition of app development platform Streamlit, and Unistore, which enables modern application use cases
  • Cybersecurity, currently deployed at CapitalOne, Dropbox, and Doordash, among others
  • Snowpipe Streaming, enabling serverless ingestion of streaming data
  • On-Premises Storage using external tables, via partnerships with Dell and Pure Storage
These new workloads, in conjunction with the traditional Data Science/ML and Data Engineering capabilities that the Data Cloud offers, significantly open up Snowflake's target market to verticals that can utilize the Data Cloud, and increase TAM by expanding on what companies can monetize on top of it.
The last piece that I'll cover in the company overview is one of my favorite aspects of the business - Data Sharing. Snowflake is the only platform that allows for sharing of data sets in a multi-cloud fashion through the Snowflake Data Marketplace.
As of FY23 Q1 there were 1358 Snowflake Data Marketplace listings, growing at 22% QoQ. These listings include data from Factset, the Centers for Disease Control, and Accuweather - all available to be purchased by other companies using Snowflake, no matter which public cloud they are on.
In my opinion, the Data Marketplace provides Snowflake with a network effect edge over AWS and Azure's data sharing platforms, where data can only be shared within their respective public cloud. The rapidly growing user base participating in the Marketplace benefits from each additional data set that is added to the platform for purchase.
The flexibility of the Data Marketplace is also a value driver, with Snowflake being the only provider to enable negotiable data set pricing, versus Amazon which requires sellers to publish fixed prices for listed data sets.
Why is the Data Cloud here to stay?
By now I hope that you have a fundamental understanding of Snowflake's business. In this section, I hope to convey why I think Snowflake is not only set to land-and-expand, but land-and-explode.
If you work in the technology world and/or have a basic understanding of Information Technology (IT), you know that both the Cloud and Data are here to stay. But why does Snowflake's Data Cloud have the opportunity to take that market share, and subsequently have the staying power to capitalize?
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Courtesy of Snowflake
First let's talk about that opportunity. Despite the company's revenue growth, there is still a massive runway to taking a sizeable chunk of the $248B CY26 TAM that I mentioned in the introduction. To that end, Snowflake's go-to-market strategy is focused on the largest enterprises in the world, but has only captured just over 25% of the Forbes Global 2000. They are slowly but surely moving down the market, counting over 50% of the Fortune 500 as customers.
These large, enterprise customers take a while to onboard, but once they do, they ramp their usage of the platform quickly. That brings me to my second objective of the section - staying power.
Snowflake technically offers a SaaS product, but they don't price the Data Cloud like a SaaS product. Snowflake's pricing is actually consumption-based, with 93% of revenue coming from consumption-based spending. Customers agree to a number of usage credits when they sign a contract, and are generally able to roll over unused capacity when they purchase additional capacity. These contracts are primarily billed annually.
All of this to say, Snowflake captures the floor of a typical SaaS model, with the upside of a consumption model. And for more than any other software vendor, CIOs are planning to increase spending on Snowflake's platform.
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Courtesy of JP Morgan Research
This year, JP Morgan did a comprehensive survey to see where CIOs are planning to increase their spend. Snowflake came in at #1, above blue-chip darlings like Microsoft, AWS, and ServiceNow; as well as growth favorites such as CrowdStrike, Cloudflare, Twilio, and MongoDB.
Data is an inherently sticky business to be in because of the time and money required to move all your data once you're on a platform. But what happens when mission-critical applications start to be built on that same platform, with many of them being externally monetized? What happens when a company runs its reporting, analytics, and data science workloads on that same platform, while integrating external data from other public clouds?
I'll tell you - the platform becomes that much stickier. And when that same platform has a consumption-based revenue model, we're talking about a potential explosion in Free Cash Flow (FCF).
Why is sub-$50B an enticing valuation?
Talking about FCF is a great time to switch gears to the discussion of why I think sub-$50B is an attractive valuation for $SNOW.
Starting with the balance sheet, Snowflake's is rock solid. Snowflake's Altman Z-Score, which takes into account profitability, leverage, liquidity, solvency, and activity ratios to measure a company's likelihood of bankruptcy, comes in at 18.03.
When Altman Z-Score <= 1.8, it is in Distress Zones.
When Altman Z-Score is between 1.8 and 3, it is in Grey Zones.
When Altman Z-Score >= 3, it is in Safe Zones.
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Courtesy of Gurufocus
As you can see, not only is Snowflake miles deep in the safe zone, but also has an elite Altman Z-Score compared to companies with a similar market cap.
To further analyze Snowflake's relative valuation I'll turn to a nifty chart from Credit Suisse
that plots companies in their coverage universe with a Y-axis of Last Twelve Months (LTM) Enterprise Value (EV)/FCF, and an X-axis of Next Twelve Months (NTM) Revenue Growth. The company bubbles are color coded by LTM Earnings Before Interest and Taxes (EBIT) Margin.
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Courtesy of Credit Suisse
This chart shows a couple of things. First and foremost that Snowflake is an outlier. It's in a league of its own when you take EV, FCF, EBIT Margin, and Rev Growth into account. Higher revenue growth is better, and the lower the EV/FCF the faster a company can pay back the cost of its acquisition or generate cash to reinvest in its business.
As the two closest data points, Datadog and Zscaler are best-in-breed solutions in growth industries (infrastructure monitoring and cybersecurity respectively), but just don't have the same potential for revenue/margin expansion and customer stickiness as Snowflake.
There's a reason that CIOs are planning to increase spend on Snowflake 3x more than they are on Zscaler - investing more in the infrastructure platform where your data, analytics, reporting, and mission-critical apps are housed is a no-brainer.
At Snowflake's 2022 Investor Day, management laid out a clear path to $10B in recurring product revenue, 78% GM, and 25% FCF margin in CY2028 (FY2029). I have confidence in this leadership team, who grew ServiceNow's revenue by 1300% over 6 years, to not only meet this guidance but exceed expectations.
Investment risks
If you're still with me, I appreciate you sticking around. No forward looking investment thesis is perfect, which is why I think that it's important to highlight the main risks to investing in Snowflake.
The biggest risk is probably their largest direct competitor, Databricks. Databricks started as a data lake provider but has expanded into a number of the same use cases as Snowflake. Databricks' primary potential competitive advantage is that they're open source. They are also still a private company, which offers both benefits for reporting/guidance and drawbacks related to funding and overall public trust.
Another risk to note, which I touched on earlier in the post, is the possibility that AWS, Azure, or GCP will open up their ecosystems to compete with Snowflake. While unlikely, Amazon, Microsoft, and Google obviously have the resources to compete if they choose to do so. The more likely alternative, which is currently happening, is that the hyperscalers actually partner with Snowflake and Databricks.
AWS has partnered with Snowflake to the point of including Snowflake in their sales pitches, recognizing the value the Data Cloud brings to customers over their own product, Redshift. GCP's partner of choice is Databricks, who they find common ground with over open sourcing, and highlight synergies between GCP's BigQuery and Databricks' Delta Lake in their sales pitches.
The last risk that I'll highlight is the potential compromise of data through data breaches or lack of compliance tools. Snowflake spends a lot of time investing in and talking about built-in compliance to the platform, but if such features were to fail, the brand could suffer significantly and lead to migrations off of the platform.

Jared Watson's avatar
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