Snowflake (SNOW -0.26%) is redefining how businesses retrieve their data. The company has broken traditional storage barriers by diminishing the importance of where data is stored. With Snowflake, large enterprises are able to access their data easier than ever before. Snowflake has the ability to capitalize on the vast amounts of data being generated for many years -- and investing in Snowflake today could allow investors to benefit from it.
What does Snowflake do?
Snowflake is a cloud-based data manager where enterprises can store raw data they receive now, and come back to it in the future. Think of the data as holiday decorations. Buying Halloween decorations makes sense during October, but at other points in the year, they are less useful. Snowflake is in the business of storing these decorations -- or raw data -- until it is needed most.
Image source: Getty Images.
A key part of Snowflake is its neutrality. If you keep some of your decorations in your garage, but others at a local storage facility, it's a hassle to drive to the facility to pick up one decoration, then dig through the garage for another. It would be much easier to have someone else gather the decorations and bring them to you. Snowflake gets data from various data warehouses -- owned by Amazon's (AMZN -1.14%) AWS, Microsoft's (MSFT -1.84%) Azure, and Alphabet's (GOOGL 0.35%) (GOOG 0.37%) Google Cloud -- and brings it to the customer. The company also allows customers to easily transform the data into ways that are understandable for the customer within seconds.
For large companies that use multiple data warehouses, Snowflake is growing ever more important. Companies are gathering more data than ever before; they don't necessarily need most of it right when they get it, but they'll want to keep it around in case -- or until -- they do. That's why Snowflake expects companies' cloud spending to increase 235% to $356 billion annually by 2025.
Why this Snowflake is different
Snowflake's neutrality, simplicity, and ease of use are the strong competitive advantages that have allowed the company to see strong growth over the past year. Even if Microsoft and Amazon were to partner to provide some sort of neutrality for consumers, they would not be able to encompass the same offering that Snowflake offers. Whether a customer's data is stored on Amazon, Microsoft, or smaller providers like DigitalOcean (DOCN -0.90%), Snowflake can accommodate it all. For its competitors to do what Snowflake is doing, they would have to create partnerships with all the other warehouse providers, all of whom compete with one another.
Snowflake increased its customer count by 60% year over year to nearly 5,000 last quarter, which is impressive, considering that it competes with data management titans such as Amazon and Google.
It has also converted customers into larger ones over time. With a net revenue retention figure of 168% or higher over the past three quarters -- up from 158% in the year-ago period -- it has grown its number of customers paying over $1 million by 107% year over year, to 116.
When you consider all of this strong customer growth, it should come as no surprise that Snowflake's revenue has also been increasing rapidly. It's grown 18%-22% sequentially in each quarter since Q2 2020. Revenue grew 104% year over year this quarter, and it reached $851 million during the trailing 12 months. Remaining performance obligations, or RPOs -- commitments from customers to buy services in the future -- increased 122% year over year, and they reached $5.2 billion during the trailing 12 months.
Plenty of risks
Even a strong company like Snowflake could still leave investors frostbitten. First, Snowflake is competing with big data behemoths like Amazon, Microsoft, and Alphabet. All of these companies manage data within their own data warehouses, so customers could potentially work with each company individually when retrieving their data. These large competitors, however, do not work with each other, which gives Snowflake the upper hand.
Another downside is that Snowflake is a customer of Amazon, committed to spending $1.2 billion on Amazon data storage from 2020-2025. This poses both concerns and security for Snowflake: Paying Amazon will permanently give money directly to a competitor, but it will also diminish the incentive for Amazon to run Snowflake out of business. If taking down Snowflake costs Amazon billions in future revenue, Amazon might think twice before doing so.
Snowflake trades at nearly 80 times full-year fiscal 2022 revenue guidance -- astronomically high for any company. Any bad news from the company, or larger market correction, could dramatically shrink that multiple and send Snowflake's price into a meltdown. Still, Snowflake is growing like gangbusters, and a combination of strong tailwinds and competitive advantages indicate that this growth could continue for a long time. The company itself is targeting $10 billion in annual revenue by 2028, compared to $592 million in 2020. All of this could indicate that Snowflake will grow into a storm that could accumulate massive benefits for investors over the next five years.
