Where Will Snowflake Be in 10 Years?

Snowflake (SNOW -1.00%), one of the hottest tech IPOs of 2020, is a polarizing stock. The bulls claim it's disruptive and expanding rapidly, while the bears balk at its widening losses and frothy valuations.

Snowflake's cloud-based data warehouse pulls an organization's data from a wide range of software, services, and computing platforms. Third-party applications, like Salesforce's Tableau, can then organize that data to help companies make data-driven decisions. That streamlined approach breaks down inefficient silos across large organizations.

Snowflake's IPO, which was priced at $120 per share last September, attracted big investors like Salesforce and Warren Buffett's Berkshire Hathaway. The stock opened at $245, and eventually hit $429 per share last December before tumbling all the way back to the $260s.

Image source: Getty Images.

But even after that pullback, Snowflake still trades at more than 70 times this year's sales, making it one of the market's priciest tech stocks. Will Snowflake grow into its nosebleed valuation over the next 10 years, or will it stall out and underperform the market?

Why does Snowflake command such a high premium?

A quick glance at Snowflake's rising revenue, customer growth, and net retention rates -- which gauge its year-over-year revenue growth per existing customer -- reveals why the bulls are so excited.

Data source: Snowflake. YOY = Year-over-year.

Analysts expect Snowflake's revenue to rise 88% to $1.1 billion this year, then increase another 64% to $1.83 billion in fiscal 2023.

What are Snowflake's principal weaknesses?

Snowflake's top-line growth looks impressive, but its operating and net losses are widening.

Data source: Snowflake. YOY = Year-over-year.

Those widening losses can be attributed to its rising sales, marketing, R&D, and cloud infrastructure costs. Snowflake's data warehouse is a cloud-based service that runs on top of public cloud infrastructure platforms like Amazon (AMZN -1.11%) Web Services, Microsoft's (MSFT -0.66%) Azure, and Alphabet's (GOOG 0.56%) (GOOGL 0.69%) Google Cloud.

That's ironic, since AWS, Azure, and Google Cloud all provide data warehousing services that compete against Snowflake. If these three tech giants wanted to squeeze Snowflake, they could lower their own data warehousing prices while raising Snowflake's cloud hosting fees.

Analysts expect Snowflake to gradually narrow its net losses in fiscal 2022 and 2023, but it won't generate stable profits anytime soon.

The next ten years

The next decade will test Snowflake's ability to survive and expand. First, it needs to stay ahead of AWS' Redshift, Azure's SQL Data Warehouse, and Google Cloud's BigQuery. Snowflake already served 187 of the Fortune 500 companies last quarter, but it could struggle to gain more of those massive customers as the cloud kings promote bundled data warehousing services.

To widen its moat, Snowflake recently rolled out new features like Snowpark, its developer platform for data engineers and AI scientists, and its "Powered by Snowflake" network, which helps companies build applications directly within its data cloud. The expansion of this ecosystem could lock in Snowflake's customers and keep its net retention rates high.

Snowflake also recently partnered with C3.ai and the data visualization firm Domo to natively integrate its own services into their platforms, and it will likely gain even more partners -- especially those that don't want to be tethered to the cloud giants -- over the next ten years.

$10 billion in product revenue by fiscal 2029

Snowflake's investor day presentation offers a rosy view of the future. It expects its product revenue to rise from $554 million in fiscal 2021 to $10 billion in fiscal 2029, which equals a CAGR of 43.6%.

It expects about 1,400 of its customers to be generating over $1 million in annual product revenue by fiscal 2029, up from just 77 customers in 2021, and for its average revenue from those higher-value customers to jump from $3.4 million to about $5.5 million. It also expects its adjusted product gross margins to expand from 69% in fiscal 2021 to 75% in fiscal 2029.

If Snowflake achieves its 2029 goals and generates roughly 40% sales growth for the following two years, it could potentially generate nearly $20 billion in annual revenue by fiscal 2031. Investors should take those estimates with a grain of salt, but they suggest Snowflake could grow into its frothy valuations.

But its valuations are already painfully high. It's already worth nearly $80 billion today, so it's tough to see how it can generate multibagger gains from here without overheating again.

Therefore, I believe Snowflake's stock could trade higher in a decade, but I'm not confident it will outperform the broader market or its more reasonably valued cloud peers. Valuations still matter, and there are simply too many years of unfettered growth baked into Snowflake's stock price.