Snowflake Seems to be Deeply Undervalued Right here Primarily based on Its Personal FCF Margin Evaluation

Snowflake, Inc. (SNOW) is likely one of the few corporations that forecasts its personal free money movement (FCF) margins (i.e., FCF as a proportion of income). So, if analysts’ income projections for the following 12 months come to cross, SNOW inventory seems very low cost right here.

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

I mentioned Snowflake’s current earnings and its FCF margins in an Aug. 31 Barchart article, “Snowflake is On a Tear – Its Large Free Money Movement May Push SNOW Even Greater.”

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 12 months 2026 (ending Jan. 2026) adjusted FCF margins can be 25% of income. That’s on the primary web page of its earnings launch within the steering 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 could 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 could 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 12 months. 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 (observe that is larger than administration’s $4.4 billion estimate). It’s 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 might be over +44.3% larger than final 12 months ($941.5 million).

This could result in the next 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 signifies 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 explanation 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, on condition 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 immediately’s market cap of $83.5 billion, in response to Yahoo! Finance. In different phrases, SNOW inventory could possibly be price over $364 per share:

$246.24 worth per share immediately  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. Nonetheless, many of those analysts have been taking part in catch-up with their forecasts for Snowflake for some time.

One strategy 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 choice contract, 39 days from now, reveals that the $220 strike worth put choice contract has a midpoint premium of $6.43.

That’s over 10% beneath immediately’s worth (i.e., out-of-the-money or OTM) and gives a direct 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 choice buy. That method, an investor can acquire 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 choice expiry interval reveals that the $220.00 name choice (i.e., in-the-money) has a premium of $52.80 per name contract. That interval is 214 days from now, or 5.5 intervals of 39 days.

So, which means that if the investor can repeat the short-put play for five intervals of 39 days and acquire $6.43 every time, the overall collected could be $32.15. That might 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 could be $240.65 (i.e., $220+$20.65), or 1.85% beneath immediately’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 can be price 173% extra:

$364.19 – $220.00 = $144.19

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

That may be a rather 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 value.

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

On the date of publication, Mark R. Hake, CFA didn’t have (both straight 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 revealed on Barchart.com