NEW YORK – For investors tracking high-growth tech giant Snowflake Inc. (NYSE:SNOW), the stock’s premium price tag has often been a key point of debate. However, a detailed Discounted Cash Flow (DCF) valuation model has reached a surprising conclusion: Snowflake may be trading at a significant discount.
According to a recent analysis, a two-stage DCF model estimates Snowflake’s total equity value at $99 billion. When compared to the company’s current share price of around $221, this valuation suggests the stock could be undervalued by as much as 25%, presenting a potentially compelling opportunity for those willing to look beyond the headline price.
Breaking Down the Valuation: The DCF Method
The analysis employs a widely used financial modeling technique to estimate a company’s intrinsic value based on its projected future cash flows. The core idea is simple: a dollar earned in the future is worth less than a dollar today. By forecasting future cash and then “discounting” it back to its present value, we can get a snapshot of what the company is worth right now.
The model unfolds in two stages:
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10-Year Cash Flow Forecast: Using a combination of analyst estimates and extrapolated data, the model projects Snowflake’s free cash flow (FCF) over the next decade. This forecast sees FCF growing from approximately $1.09 billion in 2026 to 26 billion**.
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Terminal Value Calculation: This second, more significant stage estimates the value of all cash flows generated after the initial 10-year period. Using a conservative perpetual growth rate of 2.9% (based on the 10-year government bond yield) and a discount rate of 8.1%, the model calculates a massive terminal value. The present value of this long-term cash flow stream is estimated to be $73 billion.
By adding the present value of the 10-year cash flows (73 billion), the analysis arrives at the total equity value of $99 billion.
A Word of Caution: The Assumptions Behind the Numbers
While the 25% discount is enticing, the analysis comes with a critical reminder: financial valuations are “rather like a telescope – move a few degrees and end up in a different galaxy.” The entire model hinges on key assumptions that investors should consider carefully.
The most important inputs are the cash flow forecasts and the discount rate. The 8.1% discount rate used in this model is derived from Snowflake’s “beta” of 1.198—a measure of its stock volatility compared to the market. A higher discount rate would result in a lower valuation, and vice versa.
Furthermore, the model does not explicitly account for an industry’s potential cyclicality or a company’s future capital needs, which could impact performance.
The Investor Takeaway
The DCF analysis provides a compelling data point suggesting that Snowflake (SNOW), despite its high-flying reputation, may hold more intrinsic value than its current market price reflects. However, it should be treated as a starting point for further research, not a definitive buy signal.
For investors, the key is to weigh the model’s bullish conclusion against its underlying assumptions. If you believe the long-term cash flow projections are realistic and the discount rate is appropriate, then Snowflake may indeed represent a touch of value in a market searching for growth.
