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Is Snowflake (SNOW) a disaster or a sleeping giant?

When Snowflake (SNOW) went public in September 2020 I believed this would be a serious competitor to other established cloud providers like Amazon and Microsoft. Their cloud services were supposed to be unique allowing users variability no one offered. I hoped the investment would be similar to investing early in companies like Amazon in 1997. This hasn’t happened. So far, investing in Snowflake turned out to be a disaster. But is it just a drawback every company experiences once in a while and at some point this turns out to be a sleeping giant waiting to be woken up? Time will show but as of today, investing in this company was a disappointment.

I invested on Snowflake early when it went IPO. I expected that it may not be a smooth and easy ride up. Everyone was pointing out that the IPO is overpriced and that the company was not making enough revenue to justify it. But so was Amazon when it went IPO and it was not making money either. All its revenue and cash flow was redirected back to future growth. Today, Amazon is a giant. I hoped Snowflake would follow the same path. And it still may follow that path!

After Amazon went public in 1997 it skyrocketed about a year after that (in 1998) and went raging until 2000. Then a dot com crash sent it to abyss. It took Amazon seven years to recover and reach the previous highs. Then, housing crisis hit and AMZN crashed again. It took until 2010 for the stock to finally break the sideways move and start moving higher:

 
AMZN vs Snowflake
 

AMZN vs Snowflake
 

Snowflake may be following the same path of scepticism of investors who are concerned about multiple things as I will try to show below. Of course, I am not saying that the charts above are indicative of the same path Snowflake must and will follow. It is a completely different company and different time. All I am saying is that as Amazon back then had many naysayers and sceptics (I was one of them) who predicted AMZN bankruptcy “next year” and thus avoided investing in the company, Snowflake may have a similar sceptic’s view. I missed investing in Amazon back then, should I miss investing in Snowflake this time too?

 

What makes Snowflake unique?

 

There are many aspects that makes me believe that Snowflake will be a serious player in the future and that it is in fact a sleeping giant. But before we review the data and address skepticism about this company, we need to first understand what Snowflake actually does and what makes this company unique.

 

What Snowflake does

 

Snowflake is a company that provides a cloud-based data platform. Essentially, it offers a service that allows businesses to store, manage, and analyze their data in the cloud. Think of it as a super-advanced, high-tech version of a traditional data warehouse, but with several modern enhancements and capabilities.

 

Key Features and Services

 

Data Storage:

 

  • Snowflake allows businesses to store large amounts of data in the cloud. This data can be structured (like databases) or semi-structured (like JSON files).

 

Data Management:

 

  • It helps in managing data efficiently, ensuring that data is accessible, secure, and organized.

 

Data Analytics:

 

  • Snowflake provides powerful tools for analyzing data. Businesses can run complex queries on their data to gain insights, make decisions, and create reports.

 

What Makes Snowflake Unique

 

Separation of Storage and Compute:

 

  • Traditional Systems: In most traditional data systems, storage (where data is kept) and compute (where data is processed and analyzed) are tied together. This means if you need more processing power, you also need to increase storage, and vice versa.
  •  

  • Snowflake’s Approach: Snowflake separates these two components. This means you can scale up or down your compute power independently of your storage. If you need more processing power for a big job, you can add it without having to pay for additional storage you don’t need. This flexibility is a significant advantage.

 

Cloud-Native:

 

  • Built for the Cloud: Unlike some older systems that were adapted for the cloud, Snowflake was designed from the ground up to operate in the cloud. This makes it more efficient and better suited to leverage cloud benefits like scalability and cost-efficiency.
  •  

  • Multi-Cloud Compatibility: Snowflake works seamlessly across multiple cloud platforms, including AWS, Azure, and Google Cloud. This means customers aren’t locked into one provider and can operate in a hybrid or multi-cloud environment.

 

Data Sharing:

 

  • Snowflake has a unique feature called Data Sharing which allows organizations to share data in real-time with other Snowflake users without having to move or copy data. This can be very useful for collaboration between departments, partners, or clients.

 

Performance and Scalability:

 

  • Performance: Snowflake uses advanced techniques to optimize query performance, making data retrieval and analysis faster.
     

  • Scalability: The platform can scale automatically to handle increased loads, ensuring consistent performance even as data and user demands grow.

 

Why Snowflake is a Potential Competitor to AWS and Azure

 

  • Specialization: While AWS and Azure offer a broad range of cloud services, Snowflake specializes in data warehousing and analytics. This specialization allows it to innovate and optimize specifically for these use cases, often outperforming more generalist solutions.
  •  

  • Flexibility: The ability to separate storage and compute gives Snowflake a cost and performance edge in many scenarios, making it an attractive choice for businesses with significant data needs.
  •  

  • Integration: Snowflake’s multi-cloud compatibility and seamless integration with other tools and platforms make it a flexible choice for businesses already using other cloud services.

 

I invested in Snowflake (as I mentioned above) and because I expected that it may not be an easy ride as there will be a lot of skeptics, I decided to use options to lower my cost basis selling options around this company. I was selling Iron Condors and covered calls and I went aggressive. Doing so, I generated so much income that I was able to lower my cost basis to $7.86 a share! Yes, a staggering $7.86!

 
Snowflake cost basis
 

With this cost basis, it doesn’t bother me anymore where the price of this stock is. But I still want to review whether it makes sense to keep investing in this company. Let’s review the reasons for the recent decline:

 

Reasons for Snowflake price decline

 

Valuation Concerns:

 

  • High Initial Valuation: Snowflake’s IPO was one of the most hyped in recent years, leading to a high initial valuation. This often results in heightened expectations that can be challenging to meet.
  •  
    Snowflake valuation
     

  • Price-to-Sales Ratio: Despite strong revenue growth, Snowflake’s price-to-sales ratio has been exceptionally high, leading to concerns about whether its stock price is justified by its earnings potential.

 

Growth Rate Deceleration:

 

  • Slowing Revenue Growth: Snowflake’s revenue growth rate has been decelerating. Investors are cautious about companies that do not maintain high growth rates, especially when valued at premium levels.
  •  
    Snowflake revenue
     

    Snowflake free cash flow
     

  • Customer Growth: While Snowflake continues to add new customers, the pace at which it is doing so has slowed, leading to concerns about its future growth trajectory.

 

Competitive Pressure:

 

  • AWS and Azure Dominance: Snowflake faces stiff competition from well-established players like AWS and Azure, which have far more resources and established customer bases.
  • Price Competition: Aggressive pricing strategies by competitors can erode Snowflake’s market share and margins.

 

Profitability Concerns:

 

  • Lack of Profitability: Snowflake is still not profitable, and the market has become less tolerant of high-growth, non-profitable tech stocks, especially with rising interest rates.
  • High Operating Costs: The company has significant operating expenses, including research and development, and sales and marketing, which have kept it from achieving profitability.

 

Macroeconomic Factors:

 

  • Interest Rate Environment: Rising interest rates have impacted high-growth tech stocks, as future earnings are discounted more heavily.
  • Market Sentiment: General market sentiment has shifted towards value stocks and away from high-growth tech stocks due to concerns about inflation and economic slowdown.

 

Insider Selling:

 

  • Selling Pressure: There has been significant insider selling, which can be perceived negatively by the market as a lack of confidence by those closest to the company.

 

Future Prospects and Considerations

 

Innovation and Product Development:

 

  • Snowflake’s continued innovation in data warehousing and analytics could drive future growth. Their ability to integrate with other platforms and provide unique solutions will be crucial.

 

Expansion into New Markets:

 

  • Expanding into new markets and industries can provide new growth avenues. Their strategic partnerships and international expansion efforts will be key areas to watch.

 

Cost Management:

 

  • Improving operational efficiency and managing costs will be essential for Snowflake to achieve profitability and sustain investor confidence.

 

Adoption of New Technologies:

 

  • Leveraging emerging technologies like artificial intelligence and machine learning can provide competitive advantages and drive future growth.

 

All these are worries investors and naysayers are using to justify Snowflake as bad investment and reasons for declining price of the stock. They compare it to SNOW’s competitors and point out losses and lack of revenue. So let’s review the data side-by-side with Amazon and Microsoft to see how Snowflake is doing:

 

Metric Snowflake (SNOW) Amazon (AMZN) Microsoft (MSFT)
Revenue (FY 2023) $2.07 billion $514 billion $198.3 billion
    $80.1 billion (AWS) $75.3 billion (Intelligent Cloud)
Recent Quarterly Revenue $774.7 million $21.35 billion (AWS) Azure: 27% growth YoY
Revenue Growth Rate 66% YoY 29% YoY (AWS) 27% YoY (Azure)
Net Income (FY 2023) -$679 million (net loss) $33.4 billion $72.7 billion
Gross Profit Margin 70% High (AWS-specific not detailed) High (cloud services)
Operating Income (FY 2023) N/A $22.8 billion (AWS) N/A (Intelligent Cloud contribution)

 

Snowflake has shown impressive growth and potential, particularly in the niche market of cloud data warehousing. However, it is still in the growth phase, focusing on expanding its market presence and achieving profitability. Amazon’s AWS and Microsoft’s Azure are much larger, more diversified, and profitable segments within their respective companies, with strong market positions and steady growth rates. Snowflake’s future success will depend on its ability to innovate, manage costs, and compete effectively against these cloud giants.

 
It is true that when we put the numbers next to each other we see that Snowflake is not doing well and the price decline is justified. Right?
 

If you believe that, you have been fooled. Comparing SNOW with AMZN and MSFT like that is comparing apples and oranges. We are looking at companie in completely different stages of their development. Snowflake went public in 2020, Amazon went public in 1997 and Microsoft in 1986. We need to look at the data within the same range of development to truly compare how Snowflake is doing vs. Amazon and Microsoft. Snowflake is just three years old, so let’s compare it to Amazon and Microsoft when these companies were three years old:

 

Financial Performance Comparison

 

1. Revenue

 

Snowflake (2023)

 

  • Annual Revenue: $2.07 billion
  • Recent Quarterly Revenue: $774.7 million

 

Amazon (2000)

 

  • Annual Revenue: $2.76 billion
  • Recent Quarterly Revenue: $672 million

 

Microsoft (1989)

 

  • Annual Revenue: $804 million
  • Recent Quarterly Revenue: $233 million

 

2. Net Income

 

Snowflake

 

  • Net Income: -$679 million (net loss)

 

Amazon

 

  • Net Income: -$720 million (net loss)

 

Microsoft

 

  • Net Income: $170 million

 

3. Growth Rate

 

Snowflake

 

  • Revenue Growth Rate: 66% year-over-year

 

Amazon

 

  • Revenue Growth Rate: Rapid, doubling year-over-year in early years

 

Microsoft

 

  • Revenue Growth Rate: Significant, revenue increased by more than 100% in the first three years post-IPO

 

Let’s put these key metrics side-by-side for better comparison:

Metric Snowflake (SNOW)
(2023)
Amazon (AMZN)
(2000)
Microsoft (MSFT)
(1989)
Annual Revenue $2.07 billion $2.76 billion $804 million
Recent Quarterly Revenue $774.7 million $672 million $233 million
Revenue Growth Rate 66% YoY Rapid growth Significant growth
Net Income -$679 million (net loss) -$720 million (net loss) $170 million
Market Position Niche in data warehousing Emerging e-commerce, starting cloud Leading software company
Focus Areas Data warehousing, analytics E-commerce, beginning of cloud Operating systems, software

 

Comparing Snowflake’s financials and growth metrics three years after its IPO with those of Amazon and Microsoft at similar stages, it is clear that all three companies experienced rapid growth and faced profitability challenges early on. Snowflake’s current growth rate is robust, similar to Amazon’s and Microsoft’s early years. However, the competitive landscape and market dynamics differ significantly, making direct comparisons challenging but still insightful. Snowflake is positioning itself in a niche market with potential, similar to how Amazon and Microsoft carved out their dominant positions over time.

The comparison indeed shows that Snowflake (SNOW) is performing reasonably well considering its stage of growth. Here’s a more detailed analysis of why investor skepticism might be overblown:

 

Key Points of Comparison

 

Revenue Growth:

 

Snowflake’s revenue growth rate of 66% year-over-year is impressive. This rapid growth is comparable to the early years of both Amazon and Microsoft, indicating a strong demand for its services.

 

Market Position:

 

Although Snowflake operates in a niche market, its focus on data warehousing and analytics positions it well against larger competitors. Amazon and Microsoft, despite their broader scope now, also started with niche focuses (e-commerce for Amazon, operating systems for Microsoft) and expanded over time.

 

Profitability:

 

Like many tech companies in their early stages, Snowflake is not yet profitable. This mirrors Amazon’s situation three years after its IPO when it also faced significant losses as it invested heavily in growth. Microsoft, being an exception with profitability early on, still invested significantly in growth and expansion.

 

Strategic Positioning and Innovation:

 

Snowflake’s innovation in data management and cloud computing makes it a strong contender in its sector. With strategic partnerships and continuous product development, it has the potential to capture more market share.

 

Long-term Perspective

 

Investment in Growth: Snowflake’s substantial investment in technology and infrastructure is geared towards long-term growth. This strategy, although impacting short-term profitability, is essential for establishing a solid market position.

Market Potential: The demand for cloud computing and data analytics continues to rise. Snowflake’s specialized solutions cater to this growing market, suggesting substantial growth potential.

Comparative Performance: When comparing Snowflake’s current performance with Amazon and Microsoft at similar stages, it’s evident that all three companies faced significant challenges but had strong growth trajectories. This comparison helps underline that early skepticism might not reflect Snowflake’s long-term potential.

 

Investor Sentiment

 

Skepticism and Volatility: Early-stage companies often face skepticism due to high valuations and initial losses. However, historical comparisons with Amazon and Microsoft show that early challenges and skepticism are common, and overcoming these can lead to substantial long-term success.

 

Conclusion

 

Snowflake’s current performance and growth strategy are indicative of a company with significant potential. While investor skepticism is not uncommon for companies at this stage, the historical context of Amazon and Microsoft suggests that early-stage challenges do not preclude long-term success. Snowflake is well-positioned in a growing market, and its innovative approach could see it becoming a major player in the cloud computing and data analytics industry. The current selling although typical to Wall Street spookiness with everything and every time, is not justified and the current prices are a great opportunity to invest in Snowflake.

It always amazes me that investors are looking for a holy grail of finding future Amazon and when they have one right under their noses, they reject it. Of course, this analysis (if we can call it one) is not a guarantee of success, Snowflake may fail and never emerge, but the opportunity is here. If you decide to invest at the current price levels, be prepared for long time while your investment may be doing nothing or even losing you money. Remember, if you invested in Amazon it took 10 years before your investment started showing some profits. Snowflake may be offering the same path.

Don’t let naysayers shake your confidence. I still think Snowflake is a sleeping giant that is waiting to be awaken. This investment is a long run and if you stay invested, you will be rewarded.

 
 





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