2022 was a whirlwind for tech stocks. Throughout the year, investors listened to management teams discuss supply chain hiccups, chip shortages, labor constraints and inflation.
All of these market variables represent unique challenges that need to be addressed. And during times of pronounced market volatility, it is not uncommon for some investors to sit on the sidelines to accumulate cash.
While we’re not out of the woods yet, some stocks appear to be good buys at current valuations. Below, you’ll see why this might be a good time to pick up some data giant shares Snowflake (SNOW 1.64%).
For the second quarter of fiscal year 2023, which ended July 31, 2022, Snowflake reported revenue of $ 497 million, an increase of 83% year-over-year. Snowflake’s revenue comes from two main sources: products and services. The revenue of the product represents its software platform, which typically results in higher margins. By comparison, professional services are typically non-recurring revenue at lower margins. For the quarter ended July 31, 2022, Snowflake generated $ 466 million in product revenue, up 83% from the same period last year.
When we look at Snowflake’s key performance indicators, the company’s high double-digit revenue growth shouldn’t come as a surprise. For example, Snowflake’s net retention rate as of July 31, 2022 was 171%, compared to 169% during the second quarter of fiscal 2022.
Net retention is an important metric for software companies because it measures annual recurring revenue streams, net of customer abandonment. As this ratio is over 100%, this implies that Snowflake is far outstripping any abandonment experienced by the company.
Another crucial metric Snowflake reveals is Remaining Performance Obligations (RPOs), which measures the dollar amount signed but not yet paid by customers. In other words, RPOs contractually owe Snowflake money at a future date. As of July 31, 2022, the company’s RPOs were $ 2.7 billion, up 78% year-over-year.
Investors should be highly encouraged that Snowflake is demonstrating such robust growth from its software platform. Additionally, given its high visibility into future revenue growth coupled with strong retention metrics, Snowflake is able to take advantage of the growing big data market.
All of these ingredients are a great recipe for expand the company’s margin profile, gain operational leverage, and pave the way for consistent profitability.
Looking at the cloud
Technology giants Microsoft, AmazonAnd Alphabet they all have great cloud computing businesses. It is important for investors to understand that the Snowflake platform relies heavily on these cloud operators.
For example, a company can use a multi-cloud strategy and have its applications running on public clouds from different providers. Snowflake’s software, called a data lake, has the ability to integrate with all three major cloud platforms. This is a huge competitive advantage.
During the earnings call, Snowflake CFO Mike Scarpelli said that “the majority of our customers, over 80%, operate on AWS and about 18% are Azure and 2% are GCP.” This dynamic isn’t entirely surprising in light of each company’s cloud achievements.
While Amazon is currently dominating the market, there is a huge opportunity for Microsoft and Alphabet. Essentially, as Microsoft and Alphabet continue to grow in the cloud, demand for Snowflake, which has strong relationships with these tech giants, is expected to increase hand in hand.
Investors may argue that as long as great technology continues to grow in the cloud, Snowflake will command more business. And given that these are typically multi-year, high-dollar cloud contracts, Snowflake should benefit from these factors in the form of higher retention rates.
Evaluation is key
Since it debuted on the public markets exactly two years ago, Snowflake stock has reached unprecedented highs, only to collapse. In 2022, Snowflake shares are down a whopping 44% as of this writing.
Some investors may argue that Snowflake shares are overvalued. Although the company is demonstrating strong topline growth, it is still not profitable and is trading 37 times its sales over the past 12 months. However, at the end of the second quarter of fiscal year 2022, Snowflake was trading 110 times the sales of the last 12 months. To put this in perspective, Snowflake’s valuation has fallen by nearly two-thirds over the past year.
While macroeconomic factors, such as inflation and supply chain challenges, are beyond Snowflake’s control, investors can see that its cohorts, namely the high-tech cloud giants, are still generating a robust growth. Given Snowflake’s reliance on public cloud providers, there’s a solid chance Snowflake will follow suit as Big Tech grows.
These favorable winds make Snowflake a compelling buy at its current valuation. For investors with a long-term horizon, this is an ideal time to raise some stocks and an average dollar cost in the existing position.
Suzanne Frey, executive of Alphabet, is a member of the board of directors of The Motley Fool. John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, is a board member of The Motley Fool. Adam Spatacco has positions in Alphabet (A shares), Amazon and Microsoft. The Motley Fool has positions and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft and Snowflake Inc. The Motley Fool has a disclosure policy.