Snowflake stock: A good buy??

What does Snowflake do?

Snowflake is a cloud-based data-warehousing service.

Companies can pool all their data into the Snowflake service and query this data to gain insights.

What’s unique about Snowflake's service is:

-You can pool data from many different sources.

-You can query this pool of data and gain insights from it relatively easily.

-You pay for what you use. When you aren’t using the service you don’t pay for it.

The Pros and Cons of investing in Snowflake

Pro # 1: Solid growth

Snowflake's revenue increased 3 fold between 2019 and 2020.

Their Gross Margin rose from 49% to 62% in the first half of 2020 compared to the same time last year.

They’re still losing money because of their ad spend but as a percentage of operating loss, revenue went from 52.12% to 75% in the span of just one year.

So they’re heading to profitability pretty quickly.

Pro # 2: Right product at the right time

Snowflake’s product makes a lot of sense. 

Most companies are becoming technology companies and technology companies need databases to store and process their data.

Hosting databases locally means incurring the cost and effort of maintaining this database.

It makes much more sense for companies to have their databases in the cloud with the ability to easily organize and interpret their data and pay based on their usage of computing power.

Con # 1: No clear moat

Snowflake clearly has a very good product, but Google, Amazon and other big players also seem to be moving aggressively into this space with their own versions of Snowflake's service. 

Snowflake Competition

So I expect snowflake's market share to decrease with time.

Con # 2: Valuation

Currently, Snowflake's stock is priced at ~$250 per share imputing a valuation of ~$70 Billion. 

If you look at their filing with the SEC , under the section "Our Opportunity", Snowflake estimates the size of their total addressable market at $81 Billion dollars.

So at $250 per share, Snowflake is priced at near the size of the total addressable market.

Accordingly, at this price, I’m not sure there’s enough meat left on the bone.

For me, assuming none of the company's dynamics change, Snowflake starts to become a compelling investment at a ~$30 billion valuation or ~$100 per share.

I’ll definitely keep an eye on this one though.