Snowflake (SNOW)

Shares of data-warehousing company Snowflake (SNOW) have been steadily beaten down to new lows over the past few weeks. Snowflake stock fell as low as $130 per share before bouncing back yesterday and today.

Though Snowflake is still one of the pricier plays in this market on a price-to-sales (P/S) basis, I think the stock is now a great value relative to its much-discounted growth rate.

Investors hate growth these days. However, Snowflake is one of the few firms that could soon find itself swimming in cash flow. Indeed, not all growth stocks are built the same or should be punished similarly. Snowflake is a potential standout play amid this brutal market sell-off, though some may find the 40 times sales multiple challenging to get behind. In any case, I am bullish on SNOW stock.

Behind Snowflake’s Consumption-Based Revenue Model

Undoubtedly, Snowflake’s consumption-based model makes it harder for analysts to forecast what’s up ahead. Indeed, a move towards the more traditional subscription-based model would make it easier to gauge growth. Though such a transition would make it easier to evaluate and value the often misunderstood big data company, investors should not expect Snowflake CEO Frank Slootman to change Snowflake’s revenue model anytime soon.

If anything, other SaaS companies may be inclined to follow Snowflake with its usage-based approach. Why? It’s in the customer’s best interest. They don’t want to pay for what they won’t use, and I believe that’s the model we’re headed towards, not just in SaaS but also across other industries.

Undoubtedly, transitioning to a consumption-based model would pose a serious problem for many SaaS firms. Not only would quarterly revenues be choppier, but many firms would be at risk of losing revenue.

Indeed, a major pitfall of the consumption-based model is that any performance enhancements would lead to less time using a service. Moving to a consumption-based revenue model would be a major pain in the neck for any firm. While I don’t expect SaaS firms to make the jump anytime soon, more firms may be open to it over the next 10 years.

I view Snowflake’s consumption-based model as an advantage. There’s peace of mind to be had by knowing you won’t be charged for services you don’t use. In that regard, firms have less of a reason not to give Snowflake a try. Monthly or annual subscriptions are a huge commitment. By doing away with such commitments, Snowflake is essentially taking down a potential barrier to its growth.

Doing away with such a barrier comes at a cost, though. Snowflake’s users are not “locked in” to contracts. That’s less certainty for the firm.

However, the users keep coming back because the technology adds tremendous value. Just because the company doesn’t lock its customers into contracts doesn’t mean it doesn’t have a sticky offering. Snowflake doesn’t need to pressure customers to sign such contracts because it knows customers can’t get enough of its offering.

If Snowflake can continue enhancing its platform and add new tools, it can increase user engagement. Then, the consumption-based model will really start to pay off. The more data goes to the cloud, the more users will use Snowflake. Indeed, the longer-term trend seems to be on the side of Snowflake and its usage-based model.

With the acquisition of Streamlit, Snowflake looks to be giving its users more of a reason to use its platform.

Still Plenty of Room to Run in the Big Data Market

The big data market is still in its early stages, and Snowflake has a front-row seat to the space. As the company caters its data cloud to various industries and use cases, it’s likely that more potential clients will come forward to see how Snowflake can help their businesses.

Though Snowflake delivered some conservative guidance in its last quarter, I do think such conservatism is justified, given the unpredictability of Snowflake’s revenue model.

In any case, it’s far better to set the bar low and fly over it in a future quarter, especially in this kind of market, where it takes more than just a beat and guidance raise to have a positive impact on a stock.

Wall Street’s Take

Turning to Wall Street, SNOW stock comes in as a Moderate Buy. Out of 24 analyst ratings, there are 15 Buys, eight Holds, and one Sell recommendation.

The average Snowflake price target is $305, implying upside potential of 94.7%. Analyst price targets range from a low of $190.00 per share to a high of $415.00 per share.

The Bottom Line on Snowflake Stock

Snowflake is innovating like it’s nobody else’s business. The company may be generating considerable operating losses—that’s a bad thing in this kind of market. However, the consumption-based model may be masking the firm’s real strength.

At around $156 per share, Snowflake looks undervalued, even though it may still be one of the priciest in terms of price/sales.