Here’s Why You Should Buy the Dip on Snowflake Stock

This article was originally published on this site

The recent tech sell-off pushed Snowflake (NYSE:SNOW) stock lower but it still remains a strong buy.

Source: Sundry Photography / Shutterstock.com

The company manufactures cloud-based digital infrastructures that enable businesses to store their data virtually. With companies operating remotely for the last 12 months, cloud solutions such as those offered by Snowflake have become increasingly popular.

At its IPO debut SNOW stock gained 113% becoming the largest software offering of all time. However, its price is down significantly since then, trading at around $220, or just 45% of its December high.

Given the demand for cloud-based solutions over the past year, the recent SNOW stock sell-off presents a great buying opportunity for investors. The company also expects to grow 85% by 2022, hinting at higher earnings ahead.

Here’s why Snowflake is a good buy right now.

SNOW Stock Has a Massive Market Opportunity

With a market cap of $67 billion, SNOW stock is trading at more than 100x revenue. The stock is grossly overvalued for a company of its size as cloud stocks usually trade at 9x to 50x revenue. But while the stock is pricey, the massive opportunity for growth does justify its lofty valuation.

The era of remote work has made Snowflake’s business model more relevant than ever. The company’s cloud solutions allow businesses to store the massive amounts of data generated every single day. According to the Snowflake, its total addressable market currently is $81 billion. The company has only capitalized on a fraction of this market share, giving it a huge runway for growth.

Adding to this market opportunity is Snowflake’s revenue potential. Revenues for the upcoming fiscal year are expected to be approximately $580 million. Between 2019 and 2021 these numbers have seen at a triple-digit growth rate. The impressive revenue values are also a testament to the growing importance of cloud solutions in managing and storing data.

The high revenue coupled with the market opportunity makes SNOW stock a great buy right now.

A Stellar Q4

The growth opportunities that lay ahead for Snowflake were reflected in the company’s Q4 earnings. Revenue grew by 117% at $190.5 million. This beat analyst estimates of $178.5 million. A large percentage of this revenue was driven by consumer products. The company has also met a lot of its remaining performance obligations (RPO) and this revenue will be recognized in future earnings. The total customer base stands at 4,139 and 77 have a product revenue greater than $1 million.

For the upcoming fiscal quarter, Snowflake provided guidance of $195 to $200 million. This would be a 92% to 96% increase year over year. According to CNBC, in FY22, Snowflake estimates its product revenue at $1 billion to $1.02 billion– an 80% growth rate.

There’s no doubt that Snowflake is in for bigger gains in the future. The company has a lot of contractual revenue that will be reflected in its upcoming earnings. And as Snowflake’s customer base grows, it can benefit from greater economies of scale.

The Bottom Line

Snowflake stock has its upsides and downsides but ultimately, I think the good outweighs the bad. One of the company’s biggest downsides is its price. Even with the recent tech sell-off, SNOW’s stock price of $236 is still high at a market valuation of $67 billion. But while this is definitely pricey, it is also worth noting that the company is growing at an exponential rate. With revenue growth expected to be in the triple digits, Snowflake’s enterprise value does not seem too high.

The recent decline in SNOW stock provides the perfect opportunity for any investors who are looking for a good cloud play. With the need to store huge amounts of virtual data while working remotely, cloud solutions have become increasingly important for businesses of all sizes. This gives Snowflake a huge runway for growth as it continues to capture a greater share of the market.

There’s no doubt that the stock is expensive but with optimistic revenue guidance and strong market potential, Snowflake looks like a bargain right now.

On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.