Snowflake Stock Forecast & Analysis: Is SNOW a Buy?

Written by Sean GraytokUpdated: 8th May 2022
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This Snowflake stock forecast will evaluate the company across multiple dimensions and help you determine its investment potential. But first, some background. 

Snowflake Stock Forecast: Background 

Snowflake is a cloud-based data storage and analytic service that revolutionized the cloud industry.

Unlike incumbent data warehouse solutions, Snowflake’s data platform was built and optimized for the cloud, allowing companies to interact with their data better.

Snowflake focuses on six core markets:

  • Financial services
  • Health care and life sciences
  • Retail and consumer packaged goods
  • Advertising media and entertainment
  • Technology
  • Government Sector

The company’s 2020 public offering was the largest software IPO to date, raising $3.4 billion at a valuation of $33 billion.

Snowflake Stock Forecast: Investment Potential

#1. Good Friends with AWS

Snowflake and Amazon have a complicated but mutually beneficial friendship.

While Snowflake is multi-cloud, it collects approximately 85% of its revenue from data analytics jobs deployed on Amazon Web Services (AWS).

However, Snowflake’s biggest rival is AWS Redshift, Amazon’s own data analytics tool.

According to UBS analyst Karl Keirstead, “This ‘frenemy’ relationship is critical to Snowflake’s success. AWS benefits far more from Snowflake spending on compute and storage infrastructure resources than they lose in the form of foregone AWS Redshift revenues.”

He added, “Snowflake represents a dream customer and partner for AWS and Microsoft Azure.”

A friendship with Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) backed by game theory.

#2. Disruption via a Cloud-Native Platform

Snowflake is 100% cloud-native and will remain on the public cloud indefinitely.

Leveraging the public cloud allowed Snowflake to disrupt the legacy on-premise data warehousing products from Oracle, IBM, and Teradata.

This is how its “utility” or “consumption” model works — i.e., companies only paying for what they use.

Additionally, it results in scalable and more cost-effective solutions.

Snowflake’s CEO Slootman said the company will not “do this endless hedging that people have done for twenty years … [by] keeping a leg in both worlds.”

Running on the private cloud is contradictory to Snowflake’s mission. It would diminish the company’s potential — and the price of its stock.

#3. Frank Slootman and the Path to $10B

Frank Slootman was named the company’s CEO just sixteen months before its IPO, replacing its long-time leader and former Microsoft executive, Bob Muglia.

Slootman is a professional CEO — Snowflake is the third company that he’s taken public.

According to Slootman himself, he’s more Marine Corps than Peace Corps. He was brought in to cut costs, drive sales, and make Snowflake a bit more corporate.

After making IPO history, Slootman has set his eyes on a new milestone: $10 billion in product revenue by 2029.

For reference, Snowflake did $554 million in FY21 revenue.

Snowflake believes the following will get it to $10 billion:

  • Defining a new “Data Cloud” market (worth $90 billion today)
  • Secular trends as software spending moves to the cloud and data management takes an incremental share
  • Database management systems and business intelligence platform spending increasing from $30 million today to $101 million by 2025
  • Enabling smaller customers to make a big purchase
  • Continuing to book more Fortune 500 companies (currently have 187)

Snowflake’s “Buffet Approved” Moat

Warren Buffet bought shares in Snowflake at its IPO — the first time in 54 years, Berkshire participated in an IPO.

On the surface, Snowflake and Buffet are like water and oil.

Buffet notoriously steers clear of high-growth tech stocks (except AAPL) and public offerings. But he made an exception for Snowflake.

It must have met his other investment criteria: a strong moat or a business’s ability to maintain a competitive advantage over its competitors to protect its market share and long-term profits.

So, what exactly did Buffett see in Snowflake’s moat?

It could have been Snowflake’s data exchange that allows organizations to share data with other companies across clouds (AWS to Azure, for example), but only if they too are Snowflake customers.

Given the large number of Fortune 500s that use Snowflake, these network effects encourage others to adopt Snowflake’s platform.

Snowflake built the best cloud-based data platform, even before Big Tech, and will enjoy many of these first-mover advantages for the foreseeable future.

Snowflake Stock Forecast & Analysis

Snowflake reported fourth-quarter earnings on March 2, 2022. Let’s see why shares dumped after the call:

  • Earnings: Loss of 43 cents per share
  • Revenue: $383.8 million vs $372.6 million, up 101% year-over-year

Shares fell as much as 30% after reporting its slowest revenue growth since 2019. 

The 101% revenue growth was less than the 110% revenue growth reported in the previous quarter. This did not please investors. 

Here are some other data from the quarter:

  • Reached approximately 6,000 customers at the end of the quarter
  • Gross margins of 70%, up from 62% two years ago
  • Expects to see 65% to 67% product revenue growth for the 2023 fiscal year

The estimated revenue growth projections will be key metrics to watch for the upcoming quarter. 

Snowflake Stock Forecast: Competitors

As previously mentioned, Snowflake has a complicated relationship with the FAAMG stocks. Here are Snowflake’s top competitors:

  • Amazon (AMZN)
  • Microsoft (MSFT)
  • Google (GOOG)
  • Databricks
  • Oracle (ORCL)
  • IBM (IBM)

Snowflake Stock Forecast: Bear Case

#1. Friends to Foes

The public cloud providers Amazon, Microsoft, and Google, are major threats to Snowflake.

They’re friends with Snowflake now, but these cloud providers are working on expanding their capabilities and shut Snowflake out of the market.

While Snowflake is trying to lessen its dependency on AWS, it might not actually have a choice.

In its first contract year with AWS, Snowflake is obligated to spend $115 million on AWS cloud infrastructure. This number increases to $350 million by 2025.

Sales must outpace costs, or it could get ugly for Snowflake.

It wouldn’t be the first time that Big Tech cannibalized a partner.

#2. Utility Revenue Model

As previously mentioned, Snowflake’s utility revenue model attracts customers because they only pay for what they use — however, this model is suboptimal for Snowflake’s financial reporting.

Customers contract for a specific amount of compute and storage capacity, and Snowflake recognizes revenue as that capacity is used.

Therefore, revenue recognition depends on the customer’s usage rate, which means there can be a lag of several months or more before Snowflake recognizes revenue.

This results in unpredictable revenue streams quarter to quarter— the opposite of annual recurring revenue subscriptions typically associated with software companies (which Wall Street loves).

The utility pricing model is certainly a net positive for Snowflake, but that doesn’t mean there aren’t inherent downsides to it.

Snowflake Stock Allocation in Your Portfolio

Can’t decide on the amount of Snowflake stock to buy, if any? The following questions might help you determine an appropriate allocation:

  • Can AWS Redshift and Snowflake coexist in the long term?
  • Will Snowflake outperform other cloud stocks like Okta (OKTA), Twilio (TWLO), and Zoom (ZM)?
  • Will existing customers continue to scale and spend more?
  • Does 50% off its highs scare or excite you?
  • Does Snowflake have to achieve $10 billion in 2029 product revenue for it to be a good investment?
  • Is the shift to the cloud already priced in?
  • Is a price-to-sales ratio of 109 too expensive?

Snowflake Stock Forecast: FAQs

Is Snowflake stock overvalued?

Snowflake is one of the most expensive stocks to own. It has a price-to-sales ratio of 109, which is significantly higher than even the most pricey growth stocks.

Is Snowflake stock a buy right now?

Snowflake stock is a buy right now if you’re a long-term believer in the company. The stock is well off its highs and represents a buying opportunity.

Bottom Line: Snowflake Stock Forecast

Sooner or later, everyone will come to the public cloud. They will bring their data, and they will have to talk to this data — and share it.

We believe Snowflake is a second-order bet on the booming cloud industry.

Keep Reading:

This article is for informational purposes only, and it is not intended to be investment advice. Read our editorial guidelines and public equities research methodology to learn more about how we researched Snowflake (SNOW) stock. 

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and leading expert in investing and financial management. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and technologies that are improving the world.