Snowflake’s Valuation: A Restriction on Potential Gains
Snowflake witnessed an impressive surge in product revenue, which constituted the majority of its top line. Fiscal 2021 saw a 120% increase, followed by 106% growth in fiscal 2022, and a 70% rise in fiscal 2023.
This growth trajectory can be partly attributed to Snowflake’s compatibility with various public cloud platforms like Amazon Web Services (AWS) and Microsoft Azure. By avoiding the confinement of its clients to a specific cloud ecosystem, Snowflake fostered a seamless collaboration across different departments and computing platforms. The centralized location of an organization’s data facilitated efficient analysis for informed decision-making purposes.
However, macroeconomic headwinds have compelled companies to curb their cloud spending, leading to a projection of only 37% growth in product revenue to $2.65 billion for Snowflake in fiscal 2024. Despite this, Snowflake remains optimistic, forecasting $10 billion in product revenue by fiscal 2029. Achieving this goal implies a compound annual growth rate (CAGR) of 30% from fiscal 2024 to fiscal 2029. Nevertheless, the stock’s current valuation, which is 22 times this year’s sales, indicates that much of this anticipated growth is already priced in.
Although Snowflake has expanded adjusted operating margins, it continues to suffer significant losses according to generally accepted accounting principles (GAAP). Coupled with decelerating growth and an inflated valuation, these factors have made Snowflake an attractive target for bearish market sentiment, especially as interest rates rise.
Oracle: An Appealing Safe-Haven Investment
Oracle reported only modest revenue growth in recent fiscal years: a 4% increase in fiscal 2021, followed by 5% growth in fiscal 2022. Excluding the acquisition of healthcare giant Cerner, organic growth in fiscal 2023 reached 7%. However, Oracle consistently generates profits, ample cash flow, and engages in regular share buybacks.
Cloud-based software and infrastructure services have been the primary source of Oracle’s recent growth, contributing 37% to its top line in the most recent quarter. Although its cloud expansion has slowed due to macroeconomic headwinds, it continues to offset the slower progress of its legacy on-site hardware and software businesses.
Oracle’s operating margins are also widening as it expands its cloud segment, streamlines Cerner’s lower-margin business, and implements cost-cutting measures. At the end of the second quarter of fiscal 2024, its trailing-12-month free cash flow (FCF) surged 20% YoY to $10.1 billion. Such robust cash flow growth enabled Oracle to repurchase $600 million in shares during the first half of fiscal 2024 while also distributing $2.2 billion in dividends.
Analysts predict an 8% increase in Oracle’s revenue and adjusted EPS for this year. Although Oracle may not immediately impress growth, value, or income investors, its stability positions it as a safe-haven investment amidst market concerns surrounding rising interest rates.
Snowflake retains its growth potential but may face limitations due to its high valuation in the coming years. Oracle’s growth rates may not be as remarkable, but it offers a stronger investment choice in the current macroeconomic environment characterized by higher interest rates.