Snowflake: Be Wary of Intensified Competition
Snowflake hosted its investor day and developer conference last week. The key update is Snowflake's long-term revenue target of $10 billion by FY'29 (Yes, not a typo, 2029). The tailwind behind the growth is the company's large customers (>$1 million in annual revenue), which management expects to reach 1400 by FY'29, up from 77 in FY'21. Management gives a conservative long-term operating margin guide of 10% that may have disappointed some investors. We think the stock has solid fundamentals but needs time to grow into its high current valuation. To make our point with a back-of-the-envelop calculation, if we assign a 25x/20x FY'29 P/S multiple on $10 billion revenue, each with a 50/50 probability, the expected return would be 15.5% based on the current price, a good but not spectacular return for long-term investors.
The company provided some upbeat updates from "Snowpark" and "Data Marketplace" during the cloud summit. By allowing data scientists to write code with their own choices in Snowflake workloads, "Snowpark" helps the company expand into the ML and data science category, a booming market led by Databrick. "Data Marketplace" is a classical platform strategy by connecting customers with third-party data vendors. Snowflake will allow data vendors to monetize data sharing directly in the data marketplace to reinforce the "network effect." There are also several partnerships and integrations with vendors such as Alteryx and Domo.
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Cloud-native data warehouse and data lake markets are growing exponentially. They are strategically important to cloud vendors as well. We expect Snowflake to face continued competition from cloud giants, each with unique strength. For example, AWS rolled out a "Redshift AQUA" recently, claiming itself "up to ten times" query speed versus other data warehouse vendors. The underlying technology is powered by a new cache (Between S3 storage and Redshift cluster) built on AWS's self-designed Nitro Chip (DPU) and custom FGPA chips. Our channel check also suggests there are aggressive price promotions from Google BigQuery and Microsoft Synapse. Aside from deep pockets, Google is famous for its AI capabilities, and Microsoft has a strong position with enterprise customers. Be wary of competition, $SNOW.
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