Snowflake Looks Deeply Undervalued Here Based on Its Own FCF Margin Analysis

Snowflake, Inc. (SNOW) is without doubt one of the few corporations that forecasts its personal free money movement (FCF) margins (i.e., FCF as a share of income). So, if analysts’ income projections for the subsequent 12 months come to cross, SNOW inventory seems to be very low cost right here.

SNOW is at $246.24 in noon buying and selling on Monday, Oct. 13. Nevertheless, it might have far more to rise – as much as $364 per share, my new worth goal, over the subsequent 12 months (NTM).

I mentioned Snowflake’s latest earnings and its FCF margins in an Aug. 31 Barchart article, “Snowflake is On a Tear – Its Huge Free Money Move Might Push SNOW Even Larger.”

That was after the corporate launched its fiscal Q2 outcomes on Aug. 27 for the quarter ended July 31.

I identified that administration is now forecasting that its fiscal yr 2026 (ending Jan. 2026) adjusted FCF margins might be 25% of income. That’s on the primary web page of its earnings launch within the steerage part.

That’s so distinctive, and since income, earnings, and money movement are very predictable for this information evaluation and cloud administration software program firm.

Primarily based on that, I forecasted that FCF can be no less than $1.1263 billion for FY 2026 (i.e., 0.25 x $4.4 billion forecast by the corporate). Utilizing a 1.0% FCF Yield metric, I estimated its goal market cap can be $112.63 billion.

That was +41.4% larger than its $79.63 billion market cap on the time (i.e., at $238.66 per share). So, I set a worth goal of $337.47 per share (i.e., +41.4% larger).

Now, primarily based on analysts’ larger income forecasts, I’ve adjusted my worth goal upward to over $364 per share..

Since then, analysts have raised their income forecasts for the next fiscal yr. For instance, they now predict income will rise to $5.71 billion, up from $5.69 billion in my August Barchar article.

Furthermore, it is smart to make use of a subsequent 12-month (NTM) forecast of income. This takes 25% of the analysts’ FY 2026 income forecast of $4.61 billion (notice that is larger than administration’s $4.4 billion estimate). It is because we are actually within the fourth quarter. I additionally use 75% of the FY 2027 forecast:

= 25% x $4.61 billion (FY 26) +75% x $5.71 billion (FY 27)

= $1.1525 billion + $4.2825 = $5.345 billion (NTM income forecast)

Assuming that the corporate continues to make an adjusted  25% FCF margin, we are able to estimate its adjusted FCF:

0.25 x $5.345 billion = $1.35875 billion NTM FCF

That may be over +44.3% larger than final yr ($941.5 million).

This may result in a better inventory worth.

In my final article, I estimated that the market would give the inventory no less than a 1.0% FCF yield valuation. That implies that if the corporate had been to pay out 100% of its FCF as a dividend, the market would give SNOW inventory a 1.0% dividend yield.

The rationale I did this was that its trailing 12-month (TTM) FCF represented about 1.0% of its market cap on the time. However, simply to be extra conservative, provided that its adj. FCF is larger than the TTM determine, let’s use a ten% larger determine, i.e., 1.10% FCF yield metric.

That lowers the FCF a number of from 100 (i.e., 1/0.01 = 100x) to 80x (i.e., 1/0.011 = 90.9x). So, right here is how this works out for the market worth estimate for SNOW inventory:

$1.35875 billion NTM FCF x 90.90 = $123.51 billion NTM mkt worth

That’s +47.9% larger than at the moment’s market cap of $83.5 billion, based on Yahoo! Finance. In different phrases, SNOW inventory might be value over $364 per share:

$246.24 worth per share at the moment  x 1.479 = $364.19 worth goal

That is larger than many different analysts. For instance, 34 analysts surveyed by AnaChart have a median of $272.33 per share. Nevertheless, many of those analysts have been taking part in catch-up with their forecasts for Snowflake for some time.

One option to play that is to purchase in-the-money (ITM) calls in longer-dated calls. They are often partly financed by shorting out-of-the-money (OTM) places in near-dated places.

For instance, the Nov. 21 put possibility contract, 39 days from now, exhibits that the $220 strike worth put possibility contract has a midpoint premium of $6.43.

That’s over 10% beneath at the moment’s worth (i.e., out-of-the-money or OTM) and offers a right away yield of 2.92% (i.e., $6.43/$220.00 = 0.02922).

The purpose is that this yield earnings can be utilized to partially finance a longer-dated in-the-money (ITM) name possibility buy. That manner, an investor can achieve from any upside in SNOW inventory on a levered foundation and with much less money outlay to profit from the upside of proudly owning 100 SNOW shares.

For instance, the Could 15, 2026, name possibility expiry interval exhibits that the $220.00 name possibility (i.e., in-the-money) has a premium of $52.80 per name contract. That interval is 214 days from now, or 5.5 durations of 39 days.

So, because of this if the investor can repeat the short-put play for five durations of 39 days and achieve $6.43 every time, the entire accrued can be $32.15. That may cowl a lot of the acquisition worth of the Could 15, 2026 name:

$52.80 -$32.15 = $20.65

In different phrases, for the online buy worth can be $240.65 (i.e., $220+$20.65), or 1.85% beneath at the moment’s worth of $245.18.

Furthermore, as an alternative of spending $24,518 to purchase 100 shares, an investor can spend simply $5,280 for the ITM Could 15, 2026, calls to regulate 100 shares.

As well as, if SNOW hits out worth goal of $364.19, the $220 calls might be value 173% extra:

$364.19 – $220.00 = $144.19

$144.19 / $52.80 = 2.73 -1 = +173% upside

That may be a far more leveraged return than the 47.9% goal upside from proudly owning SNOW shares outright. Furthermore, the short-put play will improve this return because it lowers the all-in price.

The underside line is that shorting OTM places and shopping for long-term ITM calls is an efficient option to play SNOW inventory.

On the date of publication, Mark R. Hake, CFA didn’t have (both immediately or not directly) positions in any of the securities talked about on this article. All data and information on this article is solely for informational functions. This text was initially printed on Barchart.com