If Snowflake gathers a critical mass of data within its network, then the value of the data can draw even more users to its service. Snowflake's main competitors include Observe, Actian, Incorta, Redis Labs, Cloudian, Teradata, Sisense, Amazon Web Services and Vertica Systems. Even in this best-case growth scenario, the implied value is far below Snowflake’s current price. Best fundamental research: most rigorous long & short ideas, Follow David Trainer and get email alerts. However, investors with fiduciary responsibilities should pause before following the Oracle of Omaha into this stock now. Investors with fiduciary responsibilities should pause before following the Oracle of Omaha into Snowflake now.

Should these shareholders decide it’s time to take gains, especially after the stock price soared post-IPO, heavy selling pressure could send shares lower.

We combine these two forecasts to arrive at Snowflake’s 2027 total addressable market of $66.1 billion. Microsoft recently upgraded its own data analytics service as a way to directly compete with Snowflake’s data analytics capabilities. The value of after-tax ESOs increased from $7.1 billion in FYE 2019 to $12 billion (18% of market cap) in FYE 2020. Per Figure 3, Microsoft, Amazon, and Alphabet spend hundreds of times more than Snowflake on Research and Development. In addition to a bleak competitive environment facing the company, fiduciaries should be particularly concerned with Snowflake’s large outstanding employee stock option liability (ESO). Figure 6: Current Valuation Implies Huge Market Share Growth. Snowflake’s ultimate goal is to achieve scale where it can monetize the collective network effect of its users. Even if Snowflake can grow revenue by 174% compounded annually for five years and achieve a 10% NOPAT margin, the firm is worth less than $245/share to Salesforce. Snowflake… Snowflake provided a modern data warehouse solutions which is- Storing data on the cloud i.e. Consensus estimates expect this trend to continue as revenue expectations for 4Q21 imply a 103% YoY revenue increase. Snowflake’s net operating profit after-tax (NOPAT) margin of -134%, invested capital turns of 0.4, and return on invested capital (ROIC) of -48% rank last among all peers, including Teradata, which we placed in the Danger Zone in January 2020. There were no adjustments that increased shareholder value. This adjustment represents 18% of Snowflake’s market cap. Google also is competing directly with Snowflake by making its BigQuery service more flexible and scalable for customers. Snowflake’s revenue in FYE 2020 represented just 1% of the firm’s 2020 TAM. Updated: October 2020. In this scenario, Snowflake: See the math behind this reverse DCF scenario. Coherent Market Insights expects the business intelligence and analytics market to reach $55.2 billion by 2027. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. However, the year-over-year (YoY) growth rate is falling. Figure 1 shows YoY revenue growth fell from 175% in 3Q19 to 121% in 2Q20. At any time, they can shift their strategies to focus on cutting Snowflake out of this business. In this scenario, Snowflake’s revenue in 2027 would reach $30.3 billion, or 46% of its TAM. Warren Buffett looks prudent for buying this recent tech IPO because the stock has more than doubled since he bought it. Given our analysis above, the only plausible justification for SNOW trading at such a high price is the expectation that another firm will buy it. Balance Sheet: We made $125 million of adjustments to calculate invested capital with a net increase of $124 million. For this analysis, we chose Salesforce.com Inc. (NYSE:CRM) as a potential acquirer of Snowflake, given Salesforce is an investor in Snowflake and could integrate Snowflake into its offerings.

See all adjustments to Snowflake’s valuation here. Compare Snowflake to its competitors by revenue, employee growth and other metrics at Craft. 1. You can see all the adjustments made to Snowflake’s income statement here. After adjusting for all liabilities, we can model multiple purchase price scenarios.

Below are specifics on the adjustments we make based on Robo-Analyst findings in Snowflake’s filings: Income Statement: We made $30 million of adjustments, with a net effect of removing $5 million in non-operating income (2% of revenue). For reference, SNOW’s NOPAT margin is currently -134%, Immediately achieves a 5% (equal to Amazon’s TTM margin) NOPAT margin, $12 billion in outstanding employee stock option (18% of market cap) liabilities, $227 million in operating lease (<1% of market cap) liabilities, Entrenched and well-funded competition that Snowflake relies upon to operate, Valuation implies massive market share growth. Amazon, Google, and Microsoft are quickly adding new features and improving existing functionality to match Snowflake’s services. In the first scenario, we use 117% revenue growth in years one through five (equal to 2021 consensus estimate). We use the higher growth rate in scenario two to illustrate a best-case scenario where we assume Snowflake could grow revenue faster while being integrated within Salesforce’s existing customer base. Snowflake has strong financials for a tech IPO, yet it’s important to remember … This liability represents future dilution which will directly reduce the free cash flow available to shareholders (free cash flow - FCF).

Beyond the big three tech firms, data warehouse offerings from Teradata (NYSE:TDC) and Oracle (NYSE:ORCL) and open-source platforms like Altinity stand in the way of Snowflake achieving the 46% market share implied by its current valuation. Fiduciaries should be sure to include this adjustment in their valuation of the firm. In other words, Snowflake’s valuation implies it will take nearly half of its TAM, while competing against the likes of Microsoft, Alphabet, Oracle, and Amazon. Snowflake’s competitors have more than enough capital to invest in, ensuring their services remain competitive over the long term. In the second scenario, we use a revenue growth rate of 174% in years one through five (equal to 2020’s YoY revenue growth). To report a factual error in this article, See the math behind this reverse DCF scenario, directly correlated with creating shareholder value, See the difference that real diligence makes, Doing the math: valuation implies Snowflake takes 46% of its TAM (vs. <1% currently), Simultaneous usage (allowing multiple users to access and run queries on the platform at the same time), Ability to use the service without buying and maintaining servers, A seamless data-sharing platform with internal and external businesses, A marketplace where firms can buy and sell datasets that are easy to use and manage within the Snowflake platform, Immediately achieve a 10% NOPAT margin, which is above Amazon’s but below Microsoft’s and Alphabet’s TTM margins. But stranger things have happened than a firm being acquired at an unnecessarily high premium to its intrinsic value. This scenario implies Snowflake must grow revenue at an extraordinarily high annualized rate of 97% for seven years.

Each of the above scenarios also assumes Snowflake is able to grow revenue, NOPAT and FCF without increasing working capital or fixed assets. Snowflake’s revenue growth rate is likely to continue its downward trend as the firm operates in an industry with heavy competition. Figure 9 shows the implied values for SNOW assuming Salesforce wants to achieve an ROIC on the acquisition that equals its WACC of 6%. Even in the most optimistic of scenarios, Snowflake is worth much less than its current share price. First, investors need to know that Snowflake has large liabilities that make it more expensive than the accounting numbers would initially suggest. Given the strength and resources of Snowflake’s competition, we do not believe the firm will ever achieve the scale required to drive demand for a proprietary data network.

Reviewed in Last 12 Months. To justify the price at time of writing ($245/share), Snowflake must: See the math behind this reverse DCF scenario. See the difference that real diligence makes. Further complicating Snowflake’s efforts is its reliance on Microsoft, Amazon, and Google’s public clouds. More specifically: While Snowflake is building a reputation for the ease of use and scalability of its storage and analytics, Figure 2 shows that Microsoft, Amazon, and Google already offer similar services and are not that far away from matching all of the features Snowflake provides. Instead, due to the proliferation of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked.

Each implied price is based on a "goal ROIC" assuming different levels of revenue growth. Teradata appears to be treading water as Snowflake booms. It’s worth noting that any deal that only achieves a 6% ROIC would not be accretive, as the return on the deal would equal Salesforce’s WACC. Three months after the IPO, 49 million (18% of shares outstanding) shares will become eligible for transactions. This scenario represents the minimum level of performance required not to destroy value. This assumption is highly unlikely but allows us to create best-case scenarios that demonstrate how high expectations embedded in the current valuation are.

Download now. Figure 10 shows the implied values for SNOW, assuming Salesforce wants to achieve an ROIC on the acquisition that equals 8%, which is greater than its WACC and current ROIC of 1%. The key variables are the weighted average cost of capital (WACC) and ROIC for assessing different hurdle rates for a deal to create value. Figure 7: Current Valuation Implies Huge Market Share Growth, Prescient & Strategic Intelligence, and Coherent Market Insights. Researched Snowflake but chose Microsoft Azure SQL Data Warehouse. Additionally, should the firm’s relationship with Microsoft, Amazon, or Google deteriorate, Snowflake’s operations and/or prospects for future profitability could deteriorate in parallel.