One of the biggest losers as of today's afternoon session is software company Snowflake, whose shares are down -3.9%, underperforming the Nasdaq by -3.0%.
At $149.62, SNOW is 25.34% below its average analyst target price of $200.4.
The average analyst rating for the stock is buy. SNOW lagged -3.0% behind the S&P 500 index today, and by -30.0% over the last year, returning -24.0%.
Snowflake does not release its trailing 12 month P/E ratio since its earnings per share of $-2.74 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for SNOW of -54.6. Based on the company's positive earnings guidance of $0.99, the stock has a forward P/E ratio of 151.1. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
SNOW’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Snowflake, we obtain a PEG ratio of 3.77, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of Snowflake's business, we can analyse its operating margins, which are its revenues minues its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-03-30 | 1,219,327 | -1,475,930 | -59 | 35.87 |
| 2021-03-05 | 592,049 | -893,398 | -92 |
- Average operating margins: -75.5%
- Average operating margins growth rate: 20.2%
- Coefficient of variability (lower numbers indicate less volatility): 30.9%
Snowflake's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-03-30 | 110,179 | -40,555 | 150,734 | 7614.16 |
| 2021-03-05 | -45,417 | -43,411 | -2,006 |
- Average free cash flow: $74.36 Million
- Average free cash flow growth rate: 0.0%
- Coefficient of variability (lower numbers indicating more stability): 2836911.5%
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.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the first quarter of 2023, the mean P/B ratio of the technology sector is 6.23, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Snowflake's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 9, 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 irregular cash flows with a flat 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.
