NSC

Which Is A Better Pick – Norfolk Southern Or Snowflake Stock?

We think Norfolk Southern stock (NYSE: NSC) and Snowflake stock (NYSE: SNOW) will offer similar returns in the next three years. Although these companies are from different sectors, they share similar market capitalizations of $50-55 billion. The decision to invest often comes down to finding the best stocks within the ambit of certain characteristics that suit an investment style. Investors have assigned a higher valuation multiple of 19x revenues for Snowflake stock versus 4.3x revenues for Norfolk Southern due to its significantly superior revenue growth and financial position. In the sections below, we discuss the possible returns for NSC and SNOW in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in the sections below.

1. Norfolk Southern Stock Has Fared Better Lately

NSC stock has seen little change, moving slightly from levels of $240 in early January 2021 to around $235 now, while SNOW stock has suffered a sharp decline of 40% from levels of $280 to $165 over the same period. In comparison, the S&P 500 has risen 40% over this roughly three-year period.

Overall, the performance of these stocks with respect to the index has been far from consistent. Returns for NSC stock were 25% in 2021, -17% in 2022, and -4% in 2023, while returns for SNOW stock were 20%, -58%, and 39% over these years, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that NSC underperformed the S&P in 2021 and 2023 and SNOW underperformed the S&P in 2021 and 2022.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NSC face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump?

2. Snowflake’s Revenue Growth Is Better

Snowflake’s top-line expansion has fared better than Norfolk Southern lately. While Snowflake’s revenue rose at a 70.4% average annual rate in the last three years, Norfolk Southern’s sales grew at an average rate of 7.9%. Norfolk Southern’s revenue growth was adversely impacted in 2020 due to the pandemic, but the recovery in 2021 was strong. Although the company continues to see softer volume growth, it has benefited from a robust pricing environment clubbed with higher fuel surcharges, aiding the average revenue per carload. For perspective, Norfolk Southern’s total volume of carloads and intermodal units rose just 0.9% between 2020 and 2023, while its average revenue per carload or unit rose a solid 23%.

Looking at Snowflake, its core products help businesses store, organize, and analyze data across multiple cloud providers such as Amazon Web Services and Azure, and this positions the company well in building generative AI into its tools. The revenue growth for Snowflake is driven by the increased use of its platform by its customers. Snowflake reportedly plans to acquire Reka AI for $1 billion to expand its generative AI offerings.

Our Norfolk Southern Revenue Comparison and Snowflake Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, sales for Norfolk Southern are expected to rise at a low single-digit average annual rate for the next three years, considering the softness in overall demand. Snowflake may see its revenue rise at an average annual rate of low to mid-twenties percent for the next three years, benefiting from increased consumption of its platform and a rise in capacity consumption prices.

3. Norfolk Southern Is More Profitable But Snowflake Offers Lower Financial Risk

Norfolk Southern’s operating margin declined from 37.4% in 2020 to 35.2% in 2023, while Snowflake’s operating margin has been negative, improving from -92% in fiscal 2021 (fiscal ends in January) to -39% in fiscal 2024. Looking at the last twelve-month period, Norfolk Southern’s operating margin of 33.8% fares better than -39% for Snowflake.  Note that Norfolk Southern took a $1.2 billion charge in the first half of 2023 related to the Ohio train derailment incident, resulting in operating margin contraction.

Looking at financial risk, Snowflake fares better. It has a very low level of debt of $288 million currently, implying a debt to equity ratio of 0.5%. This is much lower than the 33% figure for Norfolk Southern. Moreover, Snowflake’s 47% cash as a percentage of assets is much higher than 4% for Norfolk Southern, implying that Snowflake has a better debt position and more cash cushion.

4. The Net of It All

We see that Snowflake has seen better revenue growth and has a better financial position. On the other hand, Norfolk Southern is more profitable. Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both stocks may offer similar returns in the next three years.

Let us compare the valuation multiples for both stocks against their historical average. NSC stock is currently trading at 4.2x revenues, vs. the last five-year average of 4.8x. In contrast, Snowflake stock trades at 20x revenues vs. the last two-year average of 36x. This implies both stocks have some room for growth if the valuation multiples were to return to their historical averages. However, we don’t expect Snowflake to reach those valuation multiples anytime soon, given its cut in growth outlook to 22% in fiscal 2025, compared to a 38% y-o-y rise in fiscal 2024. As such, investors may not be willing to offer lofty valuations for Snowflake, as they did in the past. While Norfolk Southern may see slower revenue growth in the next three years, it will likely see its profit margin expand, with the Ohio incident largely behind the company. Overall, we think investors are likely to see similar returns from investing in either of the stocks for the next three years.

While NSC and SNOW may offer similar returns in the next three years, it is helpful to see how Norfolk Southern’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 NSC Return 1% -2% 115%
 SNOW Return 6% -17% -41%
 S&P 500 Return 5% 11% 137%
 Trefis Reinforced Value Portfolio 6% 6% 650%

[1] Returns as of 5/17/2024
[2] Cumulative total returns since the end of 2016

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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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