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Is Snowflake Stock a Buy After Its Q4 Earnings?

Data is becoming a foundational component to drive decision-making for businesses of all sizes. One of the biggest problems businesses face is that their data is housed in disparate systems, also called data silos.

For example, customer records may sit inside a customer relationship management system such as Salesforce, while financial data may be kept inside of Oracle. As a result, companies end up with loads of unused, disconnected data, which presents a problem for those in leadership positions.

According to research from IDC, 80% of data will be unstructured by 2025. Many companies are beginning to adopt an increased sense of urgency regarding digital transformation. One company that seems to be taking the big-data world by storm is Snowflake (NYSE: SNOW). Following the largest software IPO of all time in September 2020, the company has seen its stock plummet 33% this year. Let's dive in and see if the sell-off is warranted.

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Image source: Getty Images.

Differentiated revenue model

One interesting aspect of Snowflake's business is its revenue model. Many software companies sell a product based on a subscription term for a number of months or years. Snowflake, on the other hand, offers a usage-based consumption model.

This is an interesting pricing model because the company is not selling subscriptions that expire after a specific term, per se. Rather, as a company grows larger and becomes more sophisticated over time, its need for more data capacity should increase. As a result, if the company ends up requiring additional storage, it can rollover whatever unused storage it has into a new, larger purchase.

This means that Snowflake's customers tend to come back and buy more capacity over time. Thus, the company builds a sticky revenue base with high customer lifetime value. Per the company's fourth-quarter 2022 earnings release, Snowflake's net revenue retention rate was 178%, compared to 168% in the same period in the prior year.

Top-notch financial results

For the fiscal year ended Jan. 31, 2022, Snowflake reported $1.1 billion in revenue, representing 106% growth year over year. Perhaps even more impressive are the company's remaining performance obligations of $2.6 billion. Remaining performance obligations are an important metric for software businesses because it represents contracted future revenue that is not yet recognized. This means that Snowflake has a concrete path to grow revenues even further.

The increased demand for Snowflake's data warehouse service has provided the company with improved operating leverage. For instance, during fiscal 2022, sales and marketing expenses represented 61% of total revenue, while research and development was 38% of total revenue. Compared to the prior year, sales and marketing was 80% of revenue, while research and development was 40%. By growing its top-line revenue at a faster pace than its expenses, Snowflake has a viable path to consistent cash-flow generation.

As of Jan. 31, 2022, Snowflake had a total of 5,944 customers, up 44% year over year. Moreover, the company reported strong momentum in its customer cohort of $1 million or more. As of year-end, Snowflake had 184 customers paying at least $1 million compared to 77 customers at the end of fiscal 2021.

Valuation could be a concern

Despite dropping over 30% this year, Snowflake stock is still trading at a whopping price-to-sales ratio of 54. By comparison, big data analytics competitor Palantir currently trades at 16 times sales and has a larger revenue base.

Snowflake's net loss in fiscal 2022 was $680 million, roughly $140 million larger than in fiscal 2021. Moreover, the company is estimating full-year fiscal 2023 revenue of $1.8 billion to $1.9 billion, which would represent nearly 66% year-over-year growth at the midpoint.

Although the company is projecting strong growth and gradually achieving operating leverage, it could be a long time before Snowflake is generating consistent profitability. Technology stocks have taken a hit so far in 2022, so it can be difficult to find reasonably priced equities. Snowflake is building an industry-leading product and appears to have a strong roadmap for future growth. If you bought Snowflake shortly after its IPO, now may be a good time to lower your cost basis. However, as sell-offs continue, it may be most prudent for investors to assess future earnings before initiating a position.

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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool owns and recommends Salesforce.com and Snowflake Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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