Thinking about Snowflake? We studied It, So You Don't Have To.

One of the biggest losers as of today's afternoon session is software company Snowflake, whose shares are down -6.2%, underperforming the Nasdaq by -5.0%.
At $170.97, SNOW is 6.43% below its average analyst target price of $182.72.

The average analyst rating for the stock is buy. SNOW underperformed the S&P 500 by -6.0% so far today, but outpaced the index by 30.0% over the last year with a return of 34.4%.

Snowflake Inc. provides a cloud-based data platform for various organizations in the United States and internationally. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.

Snowflake does not release its trailing 12 month P/E ratio since its earnings per share of $-2.92 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for SNOW of -58.6. Based on the company's positive earnings guidance of $0.93, the stock has a forward P/E ratio of 183.8. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).

SNOW’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for Snowflake, we obtain a PEG ratio of 4.56, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

To better understand the strength of Snowflake's business, we can analyse its operating margins, which are its revenues minues 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 ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-01-31 2,065,659 2,190,386 -40.77 30.47
2022-01-31 1,219,327 1,475,930 -58.64 36.17
2021-01-31 592,049 893,398 -91.87 32.08
2020-01-31 264,748 506,279 -135.26 n/a
  • Average operating margins: -81.6%
  • Average operating margins growth rate: 25.9%
  • Coefficient of variability (lower numbers indicate less volatility): 50.9%

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 ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2023-01-31 545,639 -49,840 495,799 772.09
2022-01-31 110,179 -53,327 56,852 160.4
2021-01-31 -45,417 -48,704 -94,121 52.8
2020-01-31 -176,558 -22,848 -199,406 n/a
  • Average free cash flow: $64.78 Million
  • Average free cash flow growth rate: 36.6%
  • Coefficient of variability (the lower the better): 472.3%

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 first quarter of 2023, the average P/B ratio for technology companies is 6.23. 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 10, so it's likely that equity investors are over-valuing the company's assets.

As of first quarter of 2023, Snowflake is likely overvalued because it has a negative P/E ratio, an elevated P/B ratio, and a pattern of improving cash flows with an upwards trend. The stock has poor growth indicators because of its consistently negative margins with a positive growth rate, and a negative PEG ratio. We hope this analysis will inspire you to do your own research into SNOW's fundamental values -- especially their trends over time.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.