Shares of Large-cap Software company Snowflake were up 7.1% during today's afternoon session, as the S&P 500 posted a -0.0% change. Today's upwards movement shows that investor interest in SNOW stock is strong — but how closely have they studied the company's margins?
While Snowflake's gross margins for the last year are positive, we are concerned that the company's operating margins are in the red. Gross margins take into account only the cost of revenue, or variable costs — meaning the cost directly associated with producing the products or providing the service offered by the company.
Operating margins, on the other hand, take into account the company's overhead as well. Overhead, also called fixed costs, includes the company's rent, salaries for personnel not included in cost of revenue, equipment and supplies, amortization, and depreciation. Operating margins tell you about how efficiently Snowflake is run, and gross margins tell you how profitable its product line is.
|Date Reported||Revenue ($)||Cost of Revenue ($)||Gross Margins (%)||YoY Growth (%)|
Since Snowflake's cost of revenue is growing at an average 209.3% per year, while its total revenues have a 134.5% growth rate, the only explanation for the widening margins is that the company is increasing its prices. Since prices cannot be increased indefinitely, Snowflake's gross margin growth will eventually slow unless it can get its cost of revenue under control.
|Date Reported||Total Revenue ($)||Operating Expenses ($)||Operating Margins (%)||YoY Growth (%)|
The table above tells us that, on average, Snowflake has not been profitable over the last four years, which should be a warning sign to prospective investors. One bright spot, however, is that the margins are growing at an average yearly rate of 32.6%.