Regulatory Constraints And Hyperscaler Fees Will Curtail Cloud Expansion

Key Takeaways

• Expansion is threatened by stricter data laws, rising competition from local and open-source solutions, and hyperscaler risks impacting profitability.
  
• Client cost-cutting and sustainability concerns may drive a shift away from Snowflake's premium model, diminishing revenue growth and market share.
  
• Rapid innovation, expanded market reach, and disciplined operations are strengthening Snowflake's customer base, technological position, and long-term growth prospects.

Catalysts

Provides a cloud-based data platform for various organizations in the United States and internationally.

• Despite robust current revenue growth, an expected increase in global data sovereignty laws and regional regulatory constraints is likely to fragment the cloud data market, limiting Snowflake's ability to expand internationally and slowing top-line growth as customers in sensitive regions may turn to local or fragmented solutions.
  
• As enterprises focus on aggressive cost optimization and automation driven by AI, demand for premium, usage-priced platforms like Snowflake may shrink, leading larger clients to consolidate spending on less expensive, built-in options from existing cloud providers, directly pressuring Snowflake's product revenue and reducing renewal growth rates.
  
• Heavy reliance on public cloud infrastructure subjects Snowflake to the risk of hyperscalers (AWS, Azure, GCP) increasing platform fees or introducing competing native data warehousing solutions, which could rapidly compress gross and net margins by raising costs and eroding Snowflake's pricing power.
  
• The rapid advancement of open-source and community-driven data storage and analytics platforms may challenge the value proposition of Snowflake's closed ecosystem, compelling enterprise customers to seek lower-cost, more transparent alternatives, which would erode market share and revenue per user over the mid-to-long term.
  
• Heightened scrutiny over sustainability and the energy intensity of cloud-based data processing makes resource-heavy usage models increasingly unattractive for global enterprises, threatening usage rates, recurring revenue, and Snowflake's long-term earnings potential as procurement priorities shift.

Snowflake Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Snowflake compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Snowflake's revenue will grow by 21.9% annually over the next 3 years.
• The bearish analysts are not forecasting that Snowflake will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Snowflake's profit margin will increase from -36.4% to the average US IT industry of 7.1% in 3 years.
• If Snowflake's profit margin were to converge on the industry average, you could expect earnings to reach $494.7 million (and earnings per share of $1.5) by about August 2028, up from $-1.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 133.2x on those 2028 earnings, up from -49.1x today. This future PE is greater than the current PE for the US IT industry at 26.8x.
• Analysts expect the number of shares outstanding to decline by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.74%, as per the Simply Wall St company report.

Snowflake Future Earnings Per Share Growth

Risks

• Accelerating adoption of AI and advanced data analytics is driving more enterprises to invest in Snowflake's platform, positioning the company to benefit from increased customer usage and resulting in potential long-term revenue and earnings growth.
  
• Continued strong execution in product innovation-illustrated by the rapid rollout of over 125 new product capabilities this quarter, significant customer adoption of Snowpark, Dynamic Tables, Cortex AI, and Apache Iceberg support-strengthens Snowflake's technological leadership, which can drive sustained revenue growth and customer retention over time.
  
• Expansion into new verticals and markets, such as federal government (with recent Department of Defense authorization) and manufacturing, along with new sector-specific AI Data Cloud offerings, significantly increases Snowflake's addressable market and could fuel long-term top-line growth.
  
• Strong customer metrics, such as a 26% year-over-year product revenue increase, a 124% net revenue retention rate, and 451 net new customers in Q1, point to high ongoing customer satisfaction and expansion, which may support continued growth in both revenue and lifetime customer value.
  
• Operational discipline, growing operating margins, and substantial share buybacks indicate efficient use of capital and a commitment to expanding both profitability and shareholder value, with increasing free cash flow and margin expansion benefitting bottom-line earnings.

Valuation

• The assumed bearish price target for Snowflake is $155.7, which represents two standard deviations below the consensus price target of $233.69. This valuation is based on what can be assumed as the expectations of Snowflake's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $440.0, and the most bearish reporting a price target of just $150.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.0 billion, earnings will come to $494.7 million, and it would be trading on a PE ratio of 133.2x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $205.77, the bearish analyst price target of $155.7 is 32.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.