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Snowflake’s ‘near flawless’ execution nabs stock another upgrade

Another week, another upgrade for shares of Snowflake Inc., which is winning new fans on Wall Street amid optimism about the company’s execution, opportunities, and cheaper valuation.

Jefferies analyst Brent Thill became the latest to upgrade Snowflake’s stock
SNOW,
-2.23%

Tuesday, joining a JPMorgan analyst who did so last week and a Canaccord Genuity analyst who started the trend the week before that. The stock was up more than 2% in premarket trading Tuesday.

“Fundamentals remain rock solid and the execution has been near flawless over many consecutive quarters, spearheaded by an all-star management team with a proven track record of scaling software businesses,” Thill wrote, in elevating his rating on Snowflake’s stock to buy from hold and boosting his target price to $200 from $125.

In his view, Snowflake has similarities to “best-in-class software platform stories” including Salesforce Inc.
CRM,
-2.48%
,
ServiceNow Inc.
NOW,
-1.47%
,
and Datadog Inc.
DDOG,
-2.12%

Additionally, Snowflake “is growing far faster than peers at similar rev scale,” Thill wrote, highlighting that the company grew revenue by more than 100% in fiscal 2022, compared with growth in the 40% range for Salesforce and ServiceNow and in the 70% range for Datadog when they were at a similar scale.

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“While SNOW is among the fastest growing names in software (with consistent triple digit growth in recent Qs), it has achieved such growth while rapidly improving its unit economics and operating leverage,” Thill wrote. He noted that the company’s “disciplined investments” are helping to improve its margins, as the company posted a 12% free-cash-flow margin in calendar 2021 and expects to reach 16% in calendar 2022, as well as 25% in calendar 2028.

Further, he sees more growth opportunities ahead. “The management team, which previously brought ServiceNow to its massive scale, believes that the market opportunity with Snowflake is even greater than with ServiceNow (currently at $100B+ market cap),” he wrote.

Thill glimpses an “attractive entry point” for those looking to invest in Snowflake following a nearly 60% decline so far this year. Snowflake now trades at a valuation of 16 times enterprise value to calendar 2023 revenue estimates, on 54% growth. For comparison, Datadog and Zscaler Inc.
ZS,
-3.86%

have the same multiple but at a lower growth rate, Thill pointed out.

“On the downside, we acknowledge the potential for further short-term volatility and should multiple contraction at current levels continue, a 10x multiple on CY23E would imply a price of $100,” he acknowledged.

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