Cloud computing investors will be cautiously waiting for Snowflake, Inc. (NYSE: SNOW) to post their most recent earnings results, later this week. This could help to clarify what to expect from cloud computing growth moving forward, especially in anticipation of other, larger firms, who will not report again until early next year.
Snowflake Skyrocketed to the Top But Has Fallen Significantly Since
Snowflake's stock had been riding high in both 2020 and 2021, perhaps most widely known as one of the most expensive stocks in the software industry over the past two years. While sitting at the top is always a great place to be, it also means there is more room to fall if things start to go awry. Obviously, things have been out of sorts for the data analytics firm as their stock has fallen more than -57% this year, so far.
It is crucial to look at the deeper variables before evaluating the strength of SNOW stock. Sure, earnings are down but projections imply the company is still doing well. After all, Snowflake's IPO in September of 2020 shocked investors when shares went public at $120—at least 35% higher than had been projected—and went to market at an astonishing $245 (which is nearly 300% higher than the original projections).
Launching with 277.3 million shares outstanding, the new price raised the company's valuation more than 200%, from $33.3 billion to almost $68 billion. More importantly, perhaps, the company managed to raise more than $3 billion based solely on its opening price, which is the most raised by any software company in history. This suggests that the company should have quickly gained some stability and it rightfully did so.
Cloud Computing Growth is Slowing
The issue SNOW is dealing with today is not necessarily about their struggles as a business. Yes, the stock is down by all major metrics, but it is putting up a fight and trying to rebound; it is not necessarily an issue of sales. Some analysts theorize that slowing public cloud growth, overall, could endure, especially if the US economy slips further into a recession.
Barring that, however, sales have been increasing both annually and quarterly since the IPO; often beating the range high but always satisfying the consensus estimate. Specifically, sales have nearly doubled between 2020 and 2021, increasing from $592.0 million to $1.2 billion. Sales have easily followed similar growth on a quarterly basis.
Earnings reflect something similar as well, though the numbers are still in the red. In addition, while earnings have consistently beat the estimate, they have been following a less-than-stable pattern of ups and downs. In Q3 of 2021, for example, actual earnings of $0.04 beat the range high and stayed in the green. Earnings for the following quarter suggested a lot of momentum, coming in at $0.12 and beating the range by nearly a dime.
However, earnings fell again on the top of the new year, 2022. This time, earnings beat the estimate but hit the top of the range at $0.08, only to fall again within the next few months. Fortunately, the $0.01 of actual earnings in Q2 still beat the consensus estimate of -$0.01; but while they managed to stay out of the red at the time, the stock is back down with updated guidance that has earnings back down to -$0.67.
Cloud Computing, Overall, Is A Moderate Buy
Although the outlook may be a bit cloudy for Snowflake, nearly every firm in the cloud space appears to be experiencing similar uncertainty. For done, a good percentage of Snowflake's peers are down significantly on the year, so far, but all have notable—and, more importantly, positive—upsides. This includes not only smaller competitors like Hubspot, Inc. (NYSE: HUBS) and Cadence Design Systems (NASDAQ: CDNS), but also behemoths like Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN).
Hubspot is down about -56% on the year, so far—which is nearly the same as that of Snowflake—while Cadence is down only about -12% on the year. Microsoft is down about twice as much, -27.79%, while Alphabet and Amazon have fallen even further: about -32.5% and -44%, respectively.
Still, each one of these stocks has been given a moderate BUY rating. And this might have something do with the fact that every one of them is expected to grow. Not only does their upside range from 15% (CDNS) to 60% (AMZN), but they are each projected to grow their earnings (except for Hubspot, which is our outlier in this group).
What is most interesting about this group all carrying the Moderate Buy rating is that so many of their metrics are different. The upside range, for one, is broad, but their EPS measures also range from -$2.38 (HUBS) to $9.28 (MSFT). The group's P/E range is extreme as well, from -121.92 (HUBS) to 58.91 (CDNS). It should be noted, here, that SNOW is also negative, at -66.69.
There is still excellent room for growth, especially for SNOW, but that is not necessarily a bad thing for a stock that was a darling of the market up until only very recently. And while there is certainly more data to compare, the overall sentiment seems to be that much of the cloud computing and storage industry is in the same boat. And the name of this boat is the SS Moderate Buy.