Service Today (NYSE: NOW) at Snowflake (NYSE: SNOW) are both high-growth cloud stocks that are stumbling because rising inflation and higher interest rates have pushed investors toward more conservative investing.
Over the past two months, ServiceNow’s stock price has dropped nearly 20%, while Snowflake’s stock price has fallen more than 30%. Should investors consider buying any of the cloud stocks now?
The differences between ServiceNow and Snowflake
Both ServiceNow and Snowflake break the loops and simplify tasks for large companies with their cloud -based subscription services.
ServiceNow provides cloud-based services that streamline digital workflows for IT professionals, employees, creators, and customers. It allows users to manage their own projects, teams, and customer interactions with a wide range of plug-ins and apps.
Snowflake’s cloud-based data warehousing platform retrieves all organizational data from a wide range of computing platforms, then memorizes those results for a wide range of third-party visualization services of data.
How fast is ServiceNow growing?
ServiceNow revenue rose 31% to $ 4.52 billion in fiscal 2020 (corresponding to the calendar year) then grew 30% to $ 5.9 billion in fiscal 2021.
It ended in 2021 with more than 7,400 customers, including approximately 80% of Fortune 500. In that total, 1,359 customers signed annual contracts worth more than $ 1 million, representing 25% growth since last year. It also ended the year with an impressive renewal rate of 99%.
ServiceNow’s outstanding performance obligations (RPO), which reflects its forward demand by adding its deferred revenue to its backlog, rose 32% for the full year. It expects its subscription revenue to increase by 28% on a consistent currency basis in 2022, while analysts expect its total revenue to grow by 25% in 2022 and increase another 24% in 2023.
ServiceNow believes it will eventually generate at least $ 15 billion in annual revenue by 2026-which will represent a compound annual growth rate (CAGR) of more than 20% from 2021 to 2026-while large companies continues to digitally streamline their operations.
How fast does Snowflake grow?
Snowflake’s revenue grew 124% to $ 592 million in fiscal 2021 (which ended Jan. 31, 2021). In the first nine months of fiscal 2022, its revenue increased 108% annually to $ 836 million. It ended the third quarter with 5,416 customers, a 52% jump from a year earlier, with a net revenue retention rate of 173%, up from 162% last year.
The snowflake growth explodes, but it gradually cools down. Analysts expect its revenue to grow 104% in fiscal 2022, increase by 66% in fiscal 2023, and increase another 56% in fiscal 2024.
However, Snowflake still believes it will grow its annual product revenue (which is worth more than 90% of its top line) from $ 554 million in fiscal 2021 to $ 10 billion in fiscal 2029 – representing a stunning CAGR. and 43.6%. It believes it will reach that target by securing 1,400 customers with more than $ 1 million in annual product revenue last year, which will be nearly ten times expanding its current customer base.
Which company is more profitable?
ServiceNow is profitable through generally accepted accounting principles (GAAP) and non -GAAP (adjusted) measures. The snowflake is not profitable by any measure.
ServiceNow’s net GAAP revenue rose 93% to $ 230 million in fiscal 2021, and analysts expect its profit to increase by 43% in 2022 and 55% in 2023. Stable growth rates, incl. a healthy gross subscription margin that remains over 80%, indicates Sustainable growth of ServiceNow.
Meanwhile, Snowflake’s net loss on GAAP widened from $ 349 million in fiscal 2020 to $ 539 million in fiscal 2021, then widened again to $ 548 million in the first nine months of fiscal 2022. Analysts expect a full year to net loss of $ 728 million, followed by a narrower loss of $ 676 million in fiscal 2023 and a broader loss of $ 804 million in fiscal 2024.
On the bright side, Snowflake expects to gradually expand its adjusted gross margin from 69% in fiscal 2021 to 75% in fiscal 2029, suggesting that it still has significant pricing power in its niche market.
We should take all that long-term forecast with a grain of salt, but ServiceNow’s steady earnings could make it a more attractive game than Snowflake because rising interest rates are stifling the appetite of market for unprofitable growth stocks.
Which stock is more reasonably valued?
ServiceNow is trading 67 times forward earnings and 14 times sales this year. Snowflake, which has yet to value its revenues, is trading at 37 times its fiscal sales estimate in 2023.
Neither stock is cheap, but ServiceNow’s valuations seem more reasonable compared to its long -term earnings growth. Snowflake investors may argue that its high price-to-sales ratio is also justified by its fiscal 2029 targets, but it has not proven that it can achieve that goal while generating stable revenue.
Therefore, ServiceNow is a safer investment than Snowflake for four simple reasons: its growth is more stable, it generates higher gross margins, it is firmly profitable, and its stock is significantly more mura.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool counseling service. Let’s be motley! Asking an investing thesis-at least one of us-helps all of us think critically about investing and make decisions that will help us become smarter, happier, and richer.