- Snowflake has quickly become one of the most expensive IPOs in its industry
- The cloud computing industry is slowing down but the long-term outlook is positive
- THE SNOW has fallen a bit but is still heavy and should pick up again
Cloud computing investors will be cautiously waiting for Snowflake, Inc. (NYSE:SNOW) to release its most recent results later this week. This could help clarify what to expect from cloud computing growth going forward, especially in anticipation of other larger companies, which won’t report again until early next year.
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The snowflake soared to the top but has since dropped significantly
Snowflake’s stock had risen in 2020 and 2021, perhaps most widely known as one of the most expensive stocks in the software industry over the past two years. While it’s still nice to sit on top, it also means there’s more room to fall if things start to go wrong.
Clearly, things have turned sour for the data analytics firm as their stock has fallen more than -57% this year so far.
It is crucial to look at the deeper variables before assessing the strength of the SNOW stock. Sure, profits are down, but the projections imply that the company is still doing well.
After all, Snowflake’s IPO in September 2020 shocked investors when shares went public at $120 – at least 35% higher than expected – and hit the market at an astonishing $245. (which is almost 300% more than the initial projections).
Launched with 277.3 million shares outstanding, the new price boosted the company’s valuation by more than 200%, from $33.3 billion to nearly $68 billion. More importantly, perhaps, the company has managed to raise over $3 billion based on its opening price alone, which is the highest by any software company in history. This suggests that the company should have gained some stability quickly and rightly so.
Cloud Computing Growth Is Slowing
The problem SNOW faces today isn’t necessarily about their struggles as a business. Yes, the stock is down by all major metrics, but it is struggling and trying to rebound; it’s not necessarily a question of sales. Some analysts are speculating that the slowdown in public cloud growth, overall, could persist, especially if the U.S. economy slides further into a recession.
Barring that, however, sales have grown both annually and quarterly since the IPO; often beating the high range but still meeting the consensus estimate. Specifically, sales nearly doubled between 2020 and 2021, from $592.0 million to $1.2 billion. Sales easily followed similar growth on a quarterly basis.
Earnings also reflect something similar, although the numbers are still in the red. Additionally, while earnings consistently exceeded the estimate, they followed a less than steady pattern of highs and lows. In the third quarter of 2021, for example, real earnings of $0.04 broke above the high range and remained in the green. Earnings for the following quarter suggested plenty of momentum, hitting $0.12 and beating the range by almost a penny.
However, earnings fell again to the high of the new year, 2022. This time earnings exceeded the estimate but reached the high end of the range at $0.08, only to fall back in the next few months. Fortunately, the actual profit of $0.01 in Q2 still exceeds the consensus estimate of -$0.01; but while they managed to stay out of the red at the time, the stock came back down with updated guidance that brought earnings down to -$0.67.
Cloud computing, overall, is a moderate buy
While the outlook may be a bit cloudy for Snowflake, nearly every company in the cloud space appears to be experiencing similar uncertainty. To do so, a good percentage of Snowflake peers are down significantly on the year, so far, but all have notable and, more importantly, positive upsides.
This not only includes smaller competitors like Hubspot, Inc. (NYSE: HUBS) and Cadence Design Systems (NASDAQ: CDNS), but also behemoths like Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOG) and Amazon (NASDAQ: GOOG). :AMZN).
Hubspot is down around -56% on the year, which is almost the same as Snowflake, while Cadence is down only around -12% on the year. Microsoft is down about twice as much, -27.79%, while Alphabet and Amazon fell again: about -32.5% and -44%, respectively.
Yet each of these stocks received a moderate buy rating. And that might have something to do with each of them having to grow up. Not only does their upside potential range from 15% (CDNS) to 60% (AMZN), but they are each expected to increase their revenue (with the exception of Hubspot, which is our outlier in this group).
What’s most interesting about this group all carrying the Moderate Buy rating is that many of their metrics are different. The upside range, for one, is wide, but their EPS metrics also range from -$2.38 (HUBS) to $9.28 (MSFT). The group’s P/E range is also extreme, from -121.92 (HUBS) to 58.91 (CDNS). Note here that SNOW is also negative, at -66.69.
There’s still great room for growth, especially for SNOW, but that’s not necessarily a bad thing for a title that was a market darling until very recently. And while there’s certainly more data to compare, the general feeling seems to be that much of the cloud computing and storage industry is in the same boat. And the name of this boat is the SS Moderate Buy.
Should you invest $1,000 in Snowflake right now?
Before you consider Snowflake, you’ll want to hear this.
MarketBeat tracks daily the highest rated and most successful research analysts on Wall Street and the stocks they recommend to their clients. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the market goes big…and Snowflake wasn’t on the list.
While Snowflake currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.
Article by Keala Miles, MarketBeat
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