Teradata Stock: Snowflake On A Budget?

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We think that Snowflake (NYSE:SNOW), a provider of cloud data warehousing solutions, is significantly overvalued compared to Teradata (NYSE:TDC), a company that provides database and analytics software. Snowflake has a market cap of about $82 billion, valued at about 75x forward revenue, while Teradata’s market cap stands at just over $5 billion, or at about 3x forward revenues. Does this gap in valuation make sense? We don’t think so. Sure, Snowflake is the hottest name in the cloud data warehousing space, which is in favor with investors, and its revenues are growing faster, but there is more to this story. While Teradata is generally associated with on-premise databases, it has made better than expected progress with its own cloud-based product. We think that could change in the narrative surrounding Teradata, potentially enabling the stock to be re-rated by investors, closing its valuation gap with Snowflake. Let’s take a closer look at the two companies’ financial performance, cloud data warehousing products, and valuations to find out more. Snowflake Vs. Teradata: SNOW Stock Looks Significantly Overvalued Compared to TDC

Revenues Growth & Margins

Snowflake’s revenues are on track to expand at an annual rate of over 140% between FY’19 and FY’21 (fiscal years end January) as demand for its cloud-based product has soared. FY’21 revenues are expected to stand at roughly $580 million, per consensus estimates, when the company reports its results during the first week of March. In comparison, Teradata has seen revenues decline from around $2.2 billion in 2018 to about $1.8 billion in 2020, as its on-premise warehousing model faced competition from Cloud-based players. However, Teradata is profitable, with its adjusted operating margins standing at about 13% last year. While these aren’t great margins for a technology company, they are still better than Snowflake, which remains deeply loss-making.

Teradata’s Progress In Cloud Data Warehousing 

While Snowflake has been more than doubling its business every year, Teradata’s cloud operations are also gaining solid traction. Specifically, over Q4 2020 the company said that the annual recurring revenue (ARR) – which is the annual value of all recurring contracts as of Q4 – for public-cloud-based services grew to $106 million, a 165% jump year-over-year. Much like Snowflake, Teradata’s product is also cloud-agnostic and works across the major public clouds from Amazon, Microsoft, and Google. The company also has a large set of existing customers that it can potentially sell its cloud-based offering to. In fact, in the company’s earnings call, it indicated that it was winning some customers away from Snowflake. Overall, Teradata expects public cloud ARR to increase by at least 165% year-over-year in Q1 2021 and expects to at least double ARR year-over-year for 2021.

Why The Valuation Gap Could Narrow

Let’s come back to the valuation. If we were to value Teradata’s cloud business alone by applying Snowflake’s current 75x revenue multiple to its $106 million run rate revenues, the business segment would be valued at about $8 billion – excluding Terada’s profitable legacy businesses, which still account for over 90% of its revenue. However, Teradata’s total current market cap stands at just about $5 billion. This means that the company should be able to unlock value from the cloud business as it continues to report strong growth in the coming quarters. Overall, we think Teradata stock looks like a better bet compared to Snowflake at this juncture, given its lower valuation and price risk, and the potential upside from its cloud business. We think that the difference in P/S multiple of 75x for Snowflake versus under 3x for Teradata will likely narrow going forward, implying better returns for Teradata stock.

[1/22/2021] Is Snowflake Stock A Buy? 

Snowflake (NYSE: SNOW) stock trades at levels of around $286, down by roughly 26% from its December highs driven in part by a partial lock-up expiration, which allowed employees to sell a portion of their vested options, and some sell-side analysts turning cautious about the company’s valuation. Snowflake stock now trades at about 75x projected FY’22 Revenue (FY ends January), well above the broader Internet software sector trading at a P/S multiple of about 15x. [1] However, hyper-growth names such as Snowflake cannot be valued based on multiples alone and investors need to look at the company’s broader story and its ability to drive long-term growth.

Our interactive dashboard analysis of Snowflake’s Valuation gives more details on the company’s Revenue, growth, and valuation.

Snowflake sells database warehousing software – using a similar standard offered by on-premise players such as Oracle – designed specifically for the cloud. This model offers a lot more flexibility and scalability, with pricing also being variable, based on consumption. Snowflake’s Revenues are projected to double in FY’21 to about $580 million and grow by almost 90% next year, per consensus figures. There is good reason to believe that Snowflake can continue to post high levels of growth going forward as well. Firstly, the addressable market is large at $81 billion, per Snowflake’s estimates. Considering that consensus Revenue estimates for 2022 stand at just around $1.1 billion, the company has plenty of room for growth. While there are other rivals in this space, including Amazon’s Redshift, Microsoft’s Azure Synapse, and Google’s Big Query, Snowflake offers strong product differentiation. Snowflake’s model works across different cloud platforms. Snowflake also separates storage from computing, enabling each to scale up or down independently, giving users better flexibility and cost savings. Snowflake is also apparently easier for customers to use, without the need for a dedicated database administrator.

The low-interest-rate environment is causing investors to take a longer-horizon view with stocks, discounting near-term profits for long-term gains and this has caused investors to pay a big premium for growth names such as Snowflake. However, Snowflake’s significant growth runway, coupled with its innovative product should make the stock a decent long-term bet at current levels although we don’t think the stock will see outsize gains in the near-term. There’s also little room for error. If Snowflake’s growth falters for any reason, the stock could see a significant correction.

[Updated 1/5/2021] What’s Happening With Snowflake Stock?

Cloud-based data warehousing company Snowflake (NYSE: SNOW) saw its stock decline by almost 30% over the last month. While not much really changed on the ground for Snowflake, which is on track to more than double revenues this fiscal year, there are a couple of factors that have likely driven the sell-off. Firstly, Snowflake stock remains very richly valued trading at over 130x consensus FY’21 Revenues and is up by about 130% from its IPO price. Considering these big gains, investors are likely booking some profits. Secondly, in mid-December Snowflake saw its first lockup release post its IPO, allowing employees to sell 25% of their vested options. While this only had a limited impact, investors are likely concerned that the full lock-up expiration, which happens this March, will put a lot more pressure on the stock. Snowflake’s float, or the shares available to investors for trading, stands at just about 18% of its total shares outstanding currently. Thirdly, with Covid-19 vaccines being rolled out globally, investors could be rethinking their allocation to cloud computing stocks which were a hot theme through the pandemic, while shifting to more value bets. This could also be a factor hurting Snowflake stock.

[11/30/2020] Why Snowflake Rallied 20%

Cloud-based data warehousing startup Snowflake (NYSE: SNOW) saw its stock rally by over 20% last week to about $330 per share, valuing the company at about $90 billion. While there wasn’t much news from the company over the past week, there could be a couple of factors that drove up the stock. Firstly, Snowflake is likely to report its first set of quarterly results as a public company on December 2 and investors are likely anticipating strong numbers. For perspective, the consensus estimates that the company will post revenue of about $148 million, and a loss per share of about -$0.26. Separately, investors have continued to double down on high-growth and software stocks through the last week, after taking a breather earlier in the month amid the vaccine news. For example, Zoom gained about 12% over the last week while Tesla stock was up by about 18%. This also likely helped Snowflake. Now while Snowflake’s story and growth rates are compelling, the company’s lofty valuation remains a concern, considering that it now trades at about 150x projected 2021 Revenues. (See our note below for the key risks that Snowflake faces.)

Our interactive analysis on Snowflake’s Valuation gives more details on the company’s Revenue and valuation.

[Updated 11/12/2020] Snowflake Stock: 3 Key Risks

Snowflake (NYSE: SNOW), the cloud-based data warehousing company that went public in September, is valued at over $65 billion, or about $240 per share. Below, we take a look at some of the key risks that the company faces.

Snowflake’s software enables organizations to manage and analyze large quantities and diverse types of data across public clouds such as Amazon’s AWS, Google Cloud, and Microsoft’s Azure, in a single, easy to use platform. However, these public cloud players also offer their own data warehousing solutions. For instance, Amazon’s AWS offers Redshift, while Google offers BigQuery and these companies have a strong incentive to promote their own warehousing offerings, which enables them to lock customers into their products and services. Snowflake acknowledges this risk in its S-1 filing, noting that these companies could use control of their public clouds to embed innovations or privileged capabilities for their competing offerings or bundle their competing products. Snowflake also relies on infrastructure from the major cloud players such as AWS and it’s also possible that they could provide Snowflake with unfavorable pricing. Such moves could hurt Snowflake’s business and profitability.

Snowflake stock also has considerable valuation risk, considering that it trades at about 115x projected FY’21 revenues, compared to the broader software space that trades at about 8x Revenues. [1] At these valuations, the company has very little room for error and needs to execute to perfection to justify its stock price. Moreover, Snowflake’s public float – which is the number of shares held by public investors – is quite low, with the company offering just 28 million shares or about 10% of its total shares outstanding during its IPO. The low supply of shares is no doubt a major reason the stock has rallied so much since its listing. With Snowflake stock up about 2x from its IPO price, it is very likely that employees and investors could cash out when the post IPO lockup period expires in March 2021, putting downward pressure on the stock.

[Updated 10/21/2020] Snowflake Vs. Palantir

The last month saw Palantir (NYSE: PLTR) and Snowflake (NYSE: SNOW) – two relatively high profile software players go public. Snowflake’s software enables organizations to manage and analyze large quantities and diverse types of data across public clouds such as Amazon’s AWS in a single, easy to use platform. Palantir offers big data and analytics solutions primarily used by governments and intelligence agencies, although it has been expanding its presence in the commercial space.

While the two companies are focused on big data, investors are valuing them very differently. Snowflake stock trades at over 120x projected FY’21 Revenues (FY ends January) while Palantir trades at just about 15x projected FY’20 Revenues (FY end December). Does this make sense? How do the companies compare in terms of business models, revenue growth rates, and margins? We provide more details below.

See our interactive analysis on Snowflake’s Valuation and Palantir’s Valuation for more details on the two companies’ valuation.

Revenues & Growth Rates

Palantir’s Revenues grew by 24% to about $740 million in 2019 and growth is likely to pick-up to levels of over 40% in 2020 as Covid-19 related disruptions increased demand for the company’s services. In comparison, Snowflake saw Revenue grow 173% from $97 million in FY’19 to about $265 million in FY’20, although the growth rate is likely to slow down to roughly 110% over the current fiscal based on consensus figures. Overall, Snowflake’s Revenues should grow at a higher rate compared to Palantir, considering its SaaS-based model which can scale to a large base of customers with much less customization. Palantir, on the other hand, needs engineers to adapt its tools to the unique needs of customers. Snowflake had over 3,100 customers as of July 2020, compared to Palantir which had about 125 customers as of its last fiscal year.

Profitability 

While Palantir is slightly ahead in terms of profit margins considering that it is the more mature company (Palantir was founded in 2003 versus Snowflake which was founded in 2012), we expect Snowflake to be more profitable in the long-run given its relatively more standardized product and lower customer acquisition costs. Snowflake posted a Gross Profit Margin of 62% for the first six months of FY’21, with Operating Margins standing at -72%. Palantir’s Gross Margins stood at about 72% over the first six months of 2020, with Operating Margins coming in at about -35%.

Valuation 

Snowflake stock has more than doubled from its IPO price of $120 to about $250 currently, valuing the company at about $70 billion. Palantir, on the other hand, hasn’t moved too much since its listing and is valued at about $15 billion. There are a couple of reasons for Snowflake’s premium valuation. Firstly, the company is growing much faster than Palantir and should also be more profitable in the long-run given its highly scalable delivery model. Investors have also been paying a big premium for growth stocks. Secondly, unlike Palantir which has high exposure to government contracts – particularly in areas related to surveillance and national security – causing transparency and perception issues, Snowflake’s business is focused on more commercial customers.

That said, Snowflake has considerable valuation risk, considering that it trades at about 122x projected FY’21 revenues, compared to Palantir which trades at just about 15x projected 2020 Revenues. The story could change quickly. If Snowflake’s growth rates slow down, with the company facing competition from cloud majors such as Amazon and Google who offer their own data warehousing solutions, investors could re-think its valuation. On the other side, investors could double down on Palantir stock if they see more proof points indicating that the company is making progress in the commercial sector, via high profile deals or stronger Revenue growth.

[Updated 9/29/2020] Putting Snowflake’s Valuation Into Perspective

Snowflake (NYSE: SNOW), the cloud-based data warehousing company that went public recently, is valued at about $60 billion, or about $220 per share. The company trades at a whopping 230x trailing Revenues – well above many other high-growth SaaS names. Can Snowflake justify this valuation? In our interactive dashboard analysis on Snowflake’s Valuation: Expensive Or Cheap we break down the company’s revenues and valuation and compare it with other high-growth software players. Parts of the analysis are summarized below.

A Brief Look At Snowflake’s Business & Risks

Snowflake’s software enables organizations to manage and analyze large quantities and diverse types of data across public clouds such as Amazon’s AWS, Google Cloud, and Microsoft’s Azure in a single, easy to use platform. Snowflake stands to benefit as businesses increasingly move to the cloud while leveraging big data and artificial intelligence. Although major public cloud players have their own data warehousing solutions, (Amazon’s AWS offers Redshift, while Google offers BigQuery), Snowflake’s platform offers more flexibility compared to rivals and works well across platforms. However, the big cloud players have a strong incentive to promote their own warehousing offerings, as it enables them to lock customers into their platforms and services. There is a possibility that these companies could use their vast resources and control over their respective platforms to gain an edge over Snowflake.

Snowflake’s Revenue

Let’s take a closer look at what’s driving Snowflake’s Revenue. Snowflake has two operating segments. 1) Products, which include Snowflake’s core data warehousing solutions. Customers pay according to the compute and storage that they use. 2) Professional Services – which includes consulting, on-site technical solution services, and training related to the platform.

Snowflake’s Product Revenue grew from $96 million in FY’19 to about $252 million in FY’20, as the company grew its customer base by 152% from 948 in FY’19 to 2,392 users. Based on the historical growth rate, and growth over Q2 (it had 3,117 customers as of July 2020), we expect Snowflake’s customer base to grow to about 4,600 in FY’21, with total Product revenues coming in at about $530 million. Snowflake’s Total Revenue, which includes its revenue from Professional Services grew from $97 million in FY’19 to about $265 in FY’20 and we expect it to grow 110% to about $557 million in FY’21.

Now Snowflake is not only adding new customers at a rapid clip, but it is also better monetizing its existing users. Snowflake’s Net Revenue Retention rate – which is the percent of revenue retained from the prior year after factoring for upgrades, downgrades, and churn – stood at 158%, indicating that existing customers continue to spend more.

Why Is Snowflake’s Trading At Such A Premium?

With benchmark interest rates at near-zero levels, investors have generally been paying a premium for growth. However, Snowflake stock, which trades at about 110x our projected FY’21 revenues for the company and over 230x FY’20 revenues appears pricey. Let’s compare Snowflake with other high growth SaaS and database players. Datadog trades at 76x trailing revenues and posted 83% revenue growth in 2020. Okta trades at 25x trailing revenues and posted 46% growth over its most recent fiscal year. MongoDB trades at 22x and posted 58% growth.

Sure Snowflake is growing faster than these companies, but there is another reason why the stock could be trading so high, namely a low supply of shares. Snowflake’s public float – which is the number of shares held by public investors – stood at just 28 million shares or about 10% of its total shares outstanding, and the low supply of shares is likely to have caused a bid up in the price. With Snowflake stock up almost 2x from its IPO price, it is very likely that employees and investors will choose to cash out as the post IPO lockup periods expire, putting downward pressure on the stock.

While Snowflake looks overpriced compared to Teradata, 2020 has created many other pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Microsoft vs. Corcept Therapeutics shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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Notes:

  1. Price To Sales Multiples By Sector, NYU Stern [↩]

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