Snowflake (SNOW): Buy, Sell, or Hold Post Q2 Earnings?

The past six months have been a windfall for Snowflake’s shareholders. The company’s stock price has jumped 55.3%, hitting $229.20 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now still a good time to buy SNOW? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.

Why Does SNOW Stock Spark Debate?

Named after the unique architecture of its data warehouse which resembles a snowflake pattern, Snowflake (NYSE:SNOW) provides a cloud-based data platform that enables organizations to consolidate, analyze, and share data across multiple cloud providers.

Two Positive Attributes:

1. Billings Surge, Boosting Cash On Hand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Snowflake’s billings punched in at $1.10 billion in Q2, and over the last four quarters, its year-on-year growth averaged 31.2%. This performance was fantastic, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

2. Outstanding Retention Sets the Stage for Huge Gains

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Snowflake’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 126% in Q2. This means Snowflake would’ve grown its revenue by 25.5% even if it didn’t win any new customers over the last 12 months.

Snowflake has an excellent net retention rate. This data point proves that the company sells useful products, and we can see that its customers are satisfied and increasing their usage over time.

One Reason to be Careful:

Operating Losses Sound the Alarms

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Snowflake’s expensive cost structure has contributed to an average operating margin of negative 37.4% over the last year. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, and Wall Street’s estimates suggest the party will continue. We tend to agree and believe the business has a good chance of reaching profitability upon scale.

Final Judgment

Snowflake’s merits more than compensate for its flaws, and with the recent rally, the stock trades at 14.8× forward price-to-sales (or $229.20 per share). Is now a good time to buy? See for yourself in our full research report, it’s free.

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