Snowflake is a hyper-growth business that's put investors on a roller coaster ride since
it came public so far this company has not been a good investment but could that change
and what does this company? do we'll tell you everything you need to know about this
business in about five minutes my name is Brian Feroldi and my name is Brian Stoffel
thanks to stockcard.io for sponsoring today's video brian snowflake is a $61 billion dollar
company that trades under the ticker symbol SNOW Snowflake's mission statement is to enable
every organization to be data driven that's simple inspirational and optional this company
understands mission statements but what does the company do snowflake has a platform that
simply focuses on big data snowflakes cloud-based software enables its customers to gather store
analyze and share data regardless of its origin now it's important to note that snowflake works
with instead of against the big cloud providers so you can use aws or azure or google cloud
it doesn't matter it'll work with snowflake now that's really attractive because enterprises don't
necessarily gonna have their data tied to just one business so by choosing to earth snowflake you're
not tied down to just any one cloud provider you can use all three at the same time depending on
your needs now in truth snowflex is actually a really complex business to fully wrap your head
around there's a link in the video description that takes you to a video that showcases exactly
what snowflake does now it's important to point out that snowflake is not a software
as a service company it's more of a platform as a service company and it has a usage-based model so
i might pay a certain amount at the beginning of a period and every time i run an inquiry i have to
pay for that because of this and because it's so popular and useful the dollar based net retention
as of the most recent quarter was 178% existing customers spending 78% more every year that's
incredible now snowflake is still in the blitz scaling mode and is rapidly adding costs to its
income statement because of that its customer acquisition costs are currently sky high there
is no doubt that so far this is a recession-proof business model this is a tool that businesses use
to make sense of the data that they have and given the nature of the company's business
model the vast majority of revenue is recurring in nature so let's talk about the company's mo i
give them credit for the network effect for two reasons one if you have your data on snowflakes
platform and you want to share it with someone you can do that seamlessly but they have to be
on the platform as well second the company's ai and machine learning plays an important role in
running these queries and the more data that they analyze the better those tools get second there's
a strong case to be made that once you start using snowflakes platform it's very hard to get off of
it as evidenced by that 178% percent dollar based net revenue retention rate now i gave the company
a small bit of credit for low cost production and that's because snowflake is willing to take
on all of your data and store it for free it will only charge you when you start using the tools to
analyze the data now if you're an upstart company looking to challenge snowflake that would be a
difficult barrier to jump over so while it's not a huge moat against bigger rivals it is against
smaller upstarts there's also an argument that the brand name snowflake is starting to resonate with
enterprises around the globe and now i just talked about low cost production against upstarts but
against the large cloud titans there is a counter positioning mode as well amazon azure google cloud
they might come up with their own tools that do the same thing as snowflake but because snowflake
is agnostic customers are more likely to flock to that server and finally this company is rapidly
adding on new customers to its platform and there's no doubt in our mind that this company's
moat is expanding rapidly all right let's look at the company's financials when you look at revenue
there's a lot to like it's basically doubled every year for the past three years the company's gross
margin over the past year is about 62% percent however this figure is rising rapidly and is
expected to continue doing so now when we look at net income a yellow flag might rise and that's
because losses on a gaap basis have not only negative but they've been expanding over time
however if you look at free cash flow the company recently became free cash flow positive
when we look at this company's balance sheet they have an enormous war chest of $5.1 billion
in zero long-term debt but because the company's net income is currently negative so are the
returns on capital snowflake's two co-founders are still involved in the company and have important
positions as the president of products and chief technology officer but they handed off the ceo job
to an accomplished executive named frank slootman a few years ago and as you can see as a team led
by slootman the company gets great reviews on glassdoor.com with slootman earning a 93
approval rating and while this is a sizable business insiders still own about 11% of
the company which is worth $7 billion dollars at current prices so what does the future look like
for the company well one thing we're sure of is the addressable market for this data warehousing
is growing exponentially but the company is also creating more products that can be used on this
data over time that's not enormous optionality but it's not insignificant either when it comes to
operating leverage snowflake has tons this company should be able to drastically improve all of its
margins as it continues to expand the addressable market is about $90 billion today we think it'll
be much bigger in the future and snowflake has only captured about one percent meanwhile all
of snowflake's growth so far has been organic now if you're a shareholder of snowflake you know this
well the company stock has been wildly volatile currently it is losing to the market by a wide
margin since going public last year on the bright side the company has already established a pattern
of beating wall street's estimates each time it reports earnings and unsurprisingly given where it
is in its growth stage snowflake is not focused on returning cash to shareholders currently
turning to risks there's a bunch to keep in mind first and foremost is competition the
company has a frenemy relationship of sorts with aws microsoft azure and google and it would be
a mistake to overlook the competition completely it's also worth noting that in the one year since
it's been public shareholders have been diluted thanks to stock-based compensation aside from that
the number one risk facing investors today is this company's extreme valuation while revenue growth
has been very high and the stock has gone nowhere shares are currently trading for more than 50
times sales and 80 times gross profit so investors are really paying a premium today to get their
hands on this hyper growth business so what should shareholders look for moving forward well one of
the most important metrics to watch is that dollar based net retention now look we don't expect it
to stay above 175% forever but if it can stay above even 140% for the next couple of quarters
and years that would be enormously positive second keep an eye on remaining performance obligations
this number is even more important than sales and we want to see this numbers hyper growth continue
finally as we mentioned snowflake is spending a lot of money to acquire customers however
that spending as a percentage of revenue is coming down if it continues to come down which it should
net income should change directions and swing up markedly how did this company score on our
investing checklist the answer there is pretty good on mine which is especially impressive
considering that this stock has lost to the market and is nowhere close to producing net income it
got a 77 when i ran through my score which is very very good and since my framework doesn't
concern itself with those things as much it scored even better on mine and 11 and a half which is
knocking on the door of being anti-fragile alright we made our public call so it's time to head on
over to stockcard.io to hold ourselves accountable we're in the anti-fragile portfolio i'm going to
place a new order the ticker symbol is snoww we're going to do a buy decision today's date
is monday march 7. this is a 200 stock so we're gonna five five shares the score was 11.5 now i'm
going to head on over to my quality checklist and i'm going to do the exact same thing now
why brian's doing this we want to remind people that you can enter the beat the brian's contest
that we started earlier this year where we each pick five stocks that we thought would do well
in 2022 we've so far had 520 people participating in this contest and you can join at any time there
you have it snowflake is a high growth business that's also trading at a nosebleed valuation
will this stock deliver awards to investors just gonna have to wait to find out brian's out