Snowflake, Inc. (SNOW) and Cloudflare Inc. (NYSE:NET) are cloud software vendors that have recently seen their once lofty share price drop precipitously. Over the last year, SNOW has dropped by 28% while Cloudflare is in negative territory with a minus 34%.
SNOW concentrates on organizing data on the cloud.
NET, on the other hand, is centered on making the cloud network itself safer and more efficient. They emphasize "serverless architecture".
SNOW is larger by revenue with $2 billion in sales over the last year compared to NET's $975 million.
SNOW has a market cap of $45 billion versus NET's $18 billion.
Of course, neither company is alone in having a negative return over the last year as can be seen by comparing SNOW and NET to the S&P 500 (SPY).
However, the S&P is only down 6% compared to SNOW's -29% and NET's -34%.
Despite the bad year, few believe that these two software platforms are not going to outperform most stocks over the coming years.
Keep in mind, neither of these companies has been around for long with SNOW going public in September 2019 and NET going public in September 2020.
In this article, I will compare Snowflake and Cloudflare head-to-head to see which one is the better 2023 investment.
As you can easily see in the table below, Snowflake and Cloudflare are very similar in almost all financial metrics.
Gross Margins (Line 5) are relatively large as most software companies are but NET leads with 70% versus SNOW's 62%.
For relatively young companies, both have positive earnings projected forward 12 months not all that common in the software industry.
And although they are both projecting positive earnings, the PE Ratios remain astronomical at 237 and 350 respectively.
Both are also cash positive as shown by Net Debt Current (Line 14).
Based on current financial metrics, neither SNOW nor NET shows any significant advantage.
Snowflake and Cloudflare have no huge differences in financial metrics as we have seen in the above section. However, looking SBC (Stock-Based Compensation) over the last 3 years we can easily see that Snowflake's SBC has grown about twice as fast as Cloudflare's.
From SNOW 10K:
As you can see SNOW's Stock-Based Compensation has grown from $79 million in 2020 to a huge $629 million in 2022 an increase of almost 800%.
NET, on the other hand, has only grown its SBC by about half of SNOW's rate going from $56 million in SBC in 2020 to $202 million in 2022 a growth rate of 360%.
Based on those numbers you can probably expect a large increase in the number of shares outstanding from SNOW relative to NET.
Snowflake and Cloudflare have no huge differences in financial metrics as we have seen in the above section. However, looking at revenue growth over the last 3 years we can easily see that Snowflake has grown about twice as fast as Cloudflare.
From SNOW 10K:
As you can see SNOW revenue has grown from $264 million in 2020 to $1.2 billion in 2022 an increase of 460%.
NET, on the other hand, has only grown its revenue by about half of SNOW's rate going from $431 million in revenue in 2020 to $975 million in 2022 a growth rate of 226%.
So on a growth basis, SNOW is growing twice as fast as NET, a very big difference.
If we look at analysts' ratings for both stocks we see that both companies are highly rated. Snowflake has 31 Buy recommendations and only 4 Sell recommendations. That is impressive.
But Cloudflare's ratings are excellent also with 19 Buy recommendations and only 2 Sells.
Looking at the quant ratings, Snowflake currently has a Hold rating while Cloudflare has a Buy rating.
Both have had Buy ratings at one time or another over the last year but NET has had a Buy for a longer period than SNOW.
Based on analysts rating I give NET a slight advantage.
The two biggest issues in my mind are revenue growth rates and Stock-Based Compensation.
In the case of Snowflake, they have a much faster revenue growth rate as seen below.
On the other hand, SNOW also has an enormous commitment to SBC and its value in dollars has been rising every year. The number of future shares involved in SBC is also very large at 105 million.
Percantage wise, the rate of growth of the share count is twice as fast at SNOW as at NET.
In choosing an investment based on these two issues I think NET has an advantage.
The obvious investment question is whether now is the time to buy either Snowflake or Cloudflare. Both have shown significant share price losses over the last year.
SNOW has had great revenue growth historically as we have seen above and even going forward they are talking plus 40% growth:
Looking to fiscal 2024, Snowflake (SNOW) expects first-quarter product revenue to be between $568M and $573M, representing a growth rate of 44% to 45% year-over-year, below the $582.1M analysts were expecting.Source: Seeking Alpha
But for some, that's not good enough.
Cloudflare on the other hand had positive results.
"In the fourth quarter, we delivered record operating profit, operating margin, and free cash flow. We also surpassed more than 2,000 large customers paying us over $100,000 per year and signed a record number of deals greater than $500,000," said co-founder & CEO Matthew Prince.source: Seeking Alpha
For the long term, both are excellent choices, but for 2023 I see Cloudflare as a classic turnaround stock with its battered share price able to begin recovery by the end of 2023.
At their current prices, Cloudflare stock is a Buy and SNOW stock is a Hold.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.