Tech stocks have taken it on the chin lately as recession fears and inflation affect business budgets. Many companies have been dropping their usage of software platforms that aren't critical to operations and the Nasdaq Composite index is down more than 24% from its all-time high.
Snowflake (SNOW -1.61%) is one of the tech stocks that's been falling; it's down more than 45% so far this year. But the business is still doing well and shows lots of promise. The company provides cloud data storage capabilities and the ability to gather, analyze, integrate, and share information and these have proven to be mission-critical services for many businesses.
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Business is booming
Gathering, integrating, and storing data is a necessity for many businesses. As companies collect data about operations, they need to analyze it, and Snowflake allows them to do just that. Therefore, when businesses feel budgets tightening, the chances are low that they will drop Snowflake.
This helped Snowflake to thrive in the most recent quarter, which ended July 31. Revenue soared 83% year over year to $497 million in the quarter, which is the second quarter of the company's fiscal 2023. It's important to note that Snowflake runs a consumption-based model, meaning that customers pay for what they use rather than paying for an unlimited subscription. Typically, customers pay for future use, and the company's remaining performance obligations -- the amount of contracted future revenue not yet recognized -- rose 78% year over year in Q2.
Existing clients also rapidly expanded usage. The number of customers generating more than $1 million in annual revenue skyrocketed 112% versus the year-ago period to 246, demonstrating that Snowflake's offerings are a must-have service for many businesses.
Snowflake is also gaining traction with its data marketplace, where customers can make money off their own data by sharing it with other customers. Listings on its marketplace reached 1,539, which jumped 13% from the previous quarter. The rising popularity of its data marketplace is an underrated factor. As more customers begin to share data, the size and value of that marketplace increases. This forms an incentive for new clients to join Snowflake, helping give the company a network effect.
Is the growth over?
This improving network effect combined with the quality of Snowflake's other services should help the company to capitalize on the lucrative opportunity ahead. By 2026, the company believes its total market will be worth $248 billion. Considering Snowflake only has $1.6 billion in trailing-12-month revenue, there's room to run.
Snowflake is also projecting incredible development over the next few years. By fiscal year 2029, it expects to have $10 billion in product revenue, which would represent a compound annual growth rate of almost 32% from its fiscal 2023 product revenue estimate of $1.9 billion.
The company is hiring rapidly to reach these goals and make the most of its potential. With other tech businesses laying off employees, Snowflake has a greater chance of hiring the best talent in the industry and this should allow it to innovate and possibly create better products than its rivals.
What could cause Snowflake to melt
One downside is that Snowflake is not profitable: It lost $388.6 million over the past six months. However, the loss is shrinking. Its net loss over the past six months represented 42% of revenue in Q2 versus 78% in the year-ago period. While still at nosebleed levels, it's encouraging to see that decline.
Additionally, the company is priced for perfection, meaning any slip-ups could cause the stock to fall. Snowflake trades at 35 times sales, and while that is lower than recent history, there's no doubt that this valuation is expensive compared to the broader tech space.
Is Snowflake a buy now?
Snowflake is not for the faint of heart. Given its high valuation, the company has to live up to expectations and likely exceed them in order to please investors. That said, its competitive advantages and tremendous adoption in this lucrative space could help make that happen.
For investors with a diversified portfolio and a long holding period, it might make sense to take a small position in Snowflake. While a great product does not always make for a great investment, Snowflake could prove to be an exception. The company's best days certainly seem to be ahead of it, and that could make for a lucrative investment.
