The shares of Snowflake Inc (NYSE: SNOW) rallied more than 5% yesterday as JP Morgan upgraded the stock to “elite territory.” JP Morgan reported this upgrade after the annual CIO survey conducted by its analysts. As a result, the stock upgraded to the “overweight” status.
JP Morgan analyst, Mark Murphy, noted that the stock is expected to rally soon. However, he did not deviate from his initial price target of $165. The expected rally is in the region of 30%. Even though the stock has fallen 68% year-to-date compared to the S&P 500’s 21% fall, they said it had shown much potential. The IPO, which occurred in September, had a price of $120.
Among the highlights of the CIO survey that influenced the upgrade was that Snowflake was regarded highly by CIOs and customers. The survey considered 120 CIOs whose companies control about $120 billion in IT infrastructure spending. The CIOs indicated that they believe Snowflake is the best company in installed base spending intentions. Also, they regarded the company as the best-emerging company with an impressive vision.
Its free cash flow generation has also reached a point where the company would make a difference in the cloud computing business. But, first, you must note that Snowflake is a cloud-computing data warehousing company with storage and analytics services. Mark Murphy also said the risk-reward dynamics of the company influenced them. Despite the industry's tailwinds, Snowflake is one of the beneficiaries. Based on JP Morgan’s metrics, the free cash flow valuation support has also propelled it into “elite status.”
In a related development, another investment firm upgraded Snowflake stock at the beginning of this month. Canaccord Genuity rated Snowflake as a buy stock, elevating it from hold. Canaccord Genuity said the decisions were based on the fact that the company was undervalued. After the announcement by JP Morgan analysts, the shares of Snowflake rallied by 12%. JP Morgan's assessment buoyed investor confidence. The shares had been rising at the beginning of the week earlier. This week, it has risen about 21.8%.
Is it time to buy Snowflakes
The cloud computing and data warehousing industry has been down this year. This is because, after covid-19, demand has slowed. In addition, the surge in inflation and rising interest rates have also affected growth companies. That was why Snowflake posted lower than expected guidance for the fiscal year 2023. However, the company reported a revenue of $1.02 billion last quarter. This shows the company is working positively to mitigate the headwinds.
The company is expected to grow about 65% to 67% this year. This figure is not that bad. But as one of the most prominent players in the cloud computing space, we know that a slight deviation from projections would negatively affect the share price. Therefore, we expect that Snowflake (NYSE: SNOW) will do everything to achieve that expectation.
But we would also note that some analysts have been trimming their price expectations. For example, JP Morgan cited earlier, refused to increase its price expectation, but maintained the $165 target. Most of the forecasts set the price at $175. We also noted that recently Salesforce.com sold its stake in the company.
Furthermore, the company is vulnerable because the focus in this period is on increasing cash flow and generating yields. Snowflake’s free cash flow has not been growing as expected, although it is quite commendable. The company has not yet become profitable since its IPO in September. But the fundamentals of the company are impressive. Therefore, Snowflake looks solid if you are focused on the long term.
For one, there is a continued trend of companies moving from on-premises databases to the cloud. Snowflake (NYSE: SNOW), in its latest earnings call, showed that spending has increased. One advantage Snowflake has over rivals is the decoupled architecture it implements. Customers are free to pick their preferred cloud service provider. Projections from the company also show that sales would grow to $10 billion by 2029.
So, if your focus is on the long term, Snowflake is a solid buy. But unfortunately, the current headwinds are masking the value of the company.
Rate this article