Snowflake: Expect More Growth, but Valuation and Risks Keep This Analyst on the Sidelines

Since debuting on the public markets roughly 15 months ago, the conversation around Snowflake (SNOW) has almost entirely revolved around its impressive growth vs. an unreasonable valuation. It’s an argument that appears unlikely to abate following the data warehousing leader’s excellent Q3 report.

Boosted by record Product revenue of $312.5 million - a 110% year-over-year uptick – Snowflake delivered $334.41 million at the top-line, in the process outpacing the Street’s call by $28.28 million. For the fifth consecutive quarter, the net revenue retention rate expanded - to 173% - while total customers increased by 52% year-over-year to 5,416.

The company is seeing strong international growth too, with EMEA (Europe, the Middle East, and Africa) revenue jumping by 174%, and the Asia-Pacific segment exhibiting a 219% uptick. The Americas still bring in 82% of total revenue, so there’s opportunity for further growth there.

While the company is not yet profitable, the display resulted in a beat for the bottom-line too, with EPS of -$0.51 coming in ahead of the estimates by $0.10. Snowflake also avoided the familiar pitfalls of the current environment, raising both the fourth quarter and the full 2022 fiscal year guidance above the consensus estimates.

The market stood up to give a round of applause, sending shares higher by 16% in the subsequent session, as several analysts lined up to raise their price targets.

However, while William Blair’s Kamil Mielczarek expects Snowflake to “deliver strong growth for the near term,” the analyst still baulks at the valuation – Snowflake shares now trade at more than 45 times Mielczarek’s fiscal 2023 revenue estimate.

Additionally, the analyst believes the Street is not factoring in the “various downside risks.” These include “slower growth from decelerating investments in sales and marketing, as well as intense competition from hyperscale cloud providers, legacy vendors, and new market entrants.”

As such, Mielczarek sticks with a Market Perform (i.e., Hold) rating and no fixed price target in mind. (To watch Mielczarek’s track record, click here)

Mielczarek belongs to a vocal minority. 8 other analysts join him on the sidelines, but they are outflanked by 14 Buys, resulting in the stock’s Moderate Buy consensus rating. Going by the $394 average price target, the analysts believe shares still have room for 14% growth in the year ahead. (See Snowflake stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.