Companies rely on a variety of data every day to make mission-critical decisions. Yet historically, they've struggled to effectively assemble that data into a cohesive singular view that they can trust to make key decisions. Snowflake (SNOW +0.30%), a provider of a cloud-based data platform, is simplifying the aggregation and analysis of data so businesses can gain valuable insights in a timely manner.
Despite Snowflake's excellent execution and growth, the company's shares, along with many other high-growth tech stocks, have taken a major beating over the past six months. Let's look at three key reasons why now could be a great time for investors to take a closer look at Snowflake.
1. It makes businesses smarter with a one-stop-shop data platform
In most companies, different groups -- such as marketing, sales, IT, and finance -- are organized as separate departments, but they rely heavily on one another for valuable information that is essential for success.
For example, if the marketing department wants to know if a campaign was profitable, it needs data from the sales and finance departments. Similarly, the product development team needs to know which product features consumers were complaining about in order to make required enhancements; the call-center team, likely part of the operations group, has the answers.
Image source: Getty Images.
Traditionally, businesses approached this problem in a disjointed manner. Every week or so, each department would copy the data it wanted from the other departments, try to fit it into its own data repository, and somehow stitch it together to make sense of it. This approach was really costly: Too many people spent too much time away from their core mission. And the information was often inaccurate and not current.
And there would be multiple copies of sensitive data floating around, leaving the company vulnerable to security breaches.
Snowflake's data cloud allows all departments in a company to share data in a central repository, organize it logically, and make it accessible securely. This provides key performance metrics to assess the health of the business, and allows advanced analytics and forecasting. With Snowflake, updating and accessing the data can also be automated.
It's breaking down the data silos within companies and creating a single source of reliable information so businesses can make smart decisions in a timely manner.
2. It thinks of its customers every step of the way
Convenience for customers has been central to Snowflake's thoughtful platform design and business model. It works with any of the major cloud platforms, including Amazon's Amazon Web Services, Alphabet's Google Cloud, or Microsoft's Azure.
Besides that flexibility, Snowflake is also highly scalable. Customers don't have to worry about slowdowns in performance when they add more users -- the platform automatically assigns more computational resources instantaneously to support the increased workload.
NYSE: SNOW
Key Data Points
Snowflake allows companies to maximize the value of their data with a broad set of tools for data analysts, developers, data scientists, and nontechnical users so they can review the raw data or perform computations for insights into business performance.
It has further enriched its ecosystem by partnering with over 425 technology companies. For instance, customers can easily integrate Salesforce's Tableau data analytics tool or Microsoft's Power BI to analyze data.
And Snowflake features usage-based pricing, charging its customers based on the amount of data they store in its cloud and the amount of computational resources they use to process it. This lets customers feel that they're getting value for their money and allows them to control costs by limiting their usage.
Snowflake's ease of operation, high performance, and rich collection of tools make it very difficult for customers to switch away from it once they migrate data to its cloud. High value for customers drives their usage of the platform, and in turn drives high revenue for the company.
3. It brilliantly translates innovation into results
CEO Frank Slootman, a veteran of the tech industry, and his team have successfully executed their business plan after taking the company public in September 2020.
New customers are adopting Snowflake at a fast pace, and existing customers continue to increase spending.
Charts by author. Data source: Snowflake.
In its recently reported first quarter of fiscal 2023 (ending on April 30), Snowflake had a net retention rate -- the measure of how much existing clients spent over the previous year -- of 174%. Over the past four fiscal years, the company has averaged an annual net retention rate of over 168%, which is a testament to its superior product and its execution.
Great traction with customers has led to an outstanding 132% compound annual growth rate in revenue from fiscal 2019 through fiscal 2022. The revenue growth has slowed in recent quarters as Snowflake is a much larger company now. Yet it reported very impressive 84% growth in the first quarter of fiscal 2023 versus a year ago. It is not yet profitable on the basis of generally accepted accounting principles (GAAP) but turned free-cash-flow positive in fiscal 2022.
With a potential economic slowdown and talks of recession, businesses might try to control spending in the near term, and that could affect Snowflake as well. Investors should watch its growth in new customers and revenue over the next few quarters.
SNOW PS Ratio data by YCharts
Shares of Snowflake trade at a price-to-sales multiple of about 28, which might seem a bit expensive. But in a world that's producing mountains of new data every minute, this high-quality business is well-positioned to capture a piece of the $90 billion opportunity in the data cloud market. Taking a small position in Snowflake at its current discounted price could turn out to be very lucrative for investors in the long run.
