Snowflake (SNOW 2.04%) has emerged as the leader of the data cloud and likely has most of its growth ahead of it. Fortune Business Insights estimated the size of the cloud storage market at $70 billion in 2021. By 2029, it expects that market to grow to $376 billion, a compound annual growth rate (CAGR) of 24%.
However, Snowflake stock has also taken a considerable hit amid the sell-off in tech stocks. The question for investors who hope to hold this cloud stock for 10 years is whether this is a buying opportunity or if the hype has made Snowflake a poor investment.
Why Snowflake?
Snowflake has mastered the art of applying cloud capabilities to data sets. When enterprises store data in silos, it often leads to a result where data sets get copied multiple times. That approach leads to further confusion when one copy of the data set may get updated, leading to questions about which copy of the data set is most accurate.
Snowflake solves this issue by maintaining the data securely in the cloud. This way, administrators can release data to select people or groups. Additionally, since Snowflake's data cloud stores data and facilitates updates in one place, users can feel more confident in the integrity of their data.
Admittedly, Amazon, Microsoft, and Alphabet also have data cloud products. However, Snowflake stands out among these large cloud companies by being provider agnostic. The fact that its product works equally well regardless of the provider gives it a competitive edge.
It also has received notoriety by attracting the interest of a notable long-term investor, Warren Buffett's Berkshire Hathaway. Before Snowflake's IPO, Berkshire bought $250 million worth of shares at the IPO price and more than 4 million additional shares from another shareholder. This amounted to a position of more than 6.1 million shares for Berkshire.
Company growth and the Snowflake stock price
Also, Snowflake seems to have barely scratched the surface of its opportunity. It claimed 6,322 customers at the end of Q1, a 40% increase over the previous year. During that time, its customer base with over $1 million in product revenue surged 98% to 206 customers.
Given the benefits of a secure and reliable database, companies have flocked to Snowflake's product. In the first quarter of fiscal 2023 (ended April 30), year-over-year revenue increased by 85% to $422 million. This was only a mild slowdown from the 106% revenue growth rate in fiscal 2022 (ended Jan. 30).
Admittedly, the company will probably not earn a profit anytime soon. Nonetheless, the fiscal Q1 loss of $166 million fell from the $203 million loss in the year-ago quarter.
Unfortunately, neither the Snowflake value proposition nor the investment from Buffett has insulated the cloud stock from the Nasdaq bear market. The stock has dropped by 60% from its 52-week high, leaving it not far above its $120 per share IPO price in 2020. Also, at a price-to-sales (P/S) ratio of 34, the sell-off is likely a valuation call, though the sales multiple briefly exceeded 180 in December 2020.
Snowflake in 10 years
Although the market could be dramatically different in 10 years, Snowflake looks like a great buy and will likely trade far ahead of current levels in 2032. Snowflake's database product solves a critical problem for users without committing them to a specific cloud provider. That factor could mean growth faster than the predicted 24% CAGR.
Moreover, while a 34 P/S ratio may seem outlandish in a bear market, it will probably appear cheap when considering the stock's likely price in 2032. That factor could validate Buffett's investment in the company and the position of those who buy now and hold.
