One of today's standouts was Snowflake, a software company whose shares are up 8.8%, outperforming the Nasdaq by 6.5%. At $134.94, its shares are -30.29% below their average analyst target price of $193.56.
The average analyst rating for the stock is buy. SNOW may have outstripped the S&P 500 index by 7.4% today, but it has lagged behind the index by -42.4% over the last year, returning -59.0%.
Snowflake Inc. provides a cloud-based data platform in the United States and internationally. The companyis in the technology sector, which groups together a wide range of industries including consumer electronics, software, computer hardware, scientific instruments and IT services. Legendary investor Warren Buffet once stated that he would never invest in technology companies. Apple is now one of his largest holdings.
The risks inherent to the technology sector are clear, but investors simply cannot ignore the potential for strong returns. Even with the lessons learnt in the 2000 tech bubble, the market continues to highly value the promise of technological innovation and the ability for these companies to build and occupy new markets.
Snowflake does not release its trailing 12 month P/E ratio since its earnings per share of $-2.1 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for SNOW of -64.3. Based on the company's positive earnings guidance of $0.49, the stock has a forward P/E ratio of 275.4. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio of US technology companies is 26.5, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand the strength of Snowflake's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ MM) | Operating Expenses ($ MM) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-01-31 | 1,219 | 1,476 | -58.64 | 36.17 |
| 2021-01-31 | 592 | 893 | -91.87 | 32.08 |
| 2020-01-31 | 265 | 506 | -135.26 | 29.5 |
| 2019-01-31 | 97 | 230 | -191.86 | n/a |
- Average operating margins: -119.4 %
- Average operating margins growth rate: 32.6 %
- Coefficient of variability (lower numbers indicate less volatility): 48.2 %
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Snowflake's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ MM) | Capital expenditures ($ MM) | Free Cash Flow ($ MM) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-01-31 | 110 | -53 | 57 | 160.4 |
| 2021-01-31 | -45 | -49 | -94 | 52.8 |
| 2020-01-31 | -177 | -23 | -199 | -34.74 |
| 2019-01-31 | -144 | -4 | -148 | n/a |
- Average free cash flow: $-96,168,250.00
- Average free cash flow growth rate: 59.5 %
- Coefficient of variability (the lower the better): 115.1 %
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, SNOW is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the third quarter of 2022, the average P/B ratio for technology companies is 5.57. In contrast, the average P/B ratio of the S&P 500 is 2.95. Snowflake's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 8.0, so it's likely that equity investors are over-valuing the company's assets.
As of third quarter of 2022, Snowflake is likely overvalued because it has a negative P/E ratio, an elevated P/B ratio, and irregular and negative cash flows that are on an upwards course. The stock has Mixed Growth Prospects because of its negative and irregular operating margins with a positive growth rate, and an average PEG ratio.
