What happened
Shares of enterprise-data company Snowflake (SNOW 2.53%) were up on Tuesday after MoffettNathanson analyst Sterling Auty recommended buying the stock. As of 12:52 p.m. ET, Snowflake was only up 1.1%, but it had been up almost 6% earlier in the session. However, if Auty is correct, Snowflake stock has a lot of gains to come.
So what
On Tuesday morning, Auty released a note recommended buying Snowflake stock, according to The Fly. But what was truly eye-catching was the $242 per share price target he put on it -- more than 40% higher than where shares traded as of this writing.
MoffettNathanson isn't the biggest research firm out there. But it did initiate coverage of Snowflake, which could potentially introduce the cloud computing company to new investors. For this reason, it's possible that Auty's note had a slightly bigger impact Tuesday than one might otherwise expect.
Now what
Investors are already quite aware that stock valuations have plummeted this year as the Federal Reserve has bumped interest rates higher in its efforts to fight inflation. When interest rates rise, returns for so-called "risk free" assets improve, and investors' appetites for riskier assets like stocks diminish. Snowflake stock exemplifies this: Its valuation has gone from an astronomical 184 times sales to its current price-to-sales ratio of about 32.
SNOW PS Ratio data by YCharts
To be clear, a price-to-sales ratio of 32 is still expensive in absolute terms. But investors and analysts alike still appear comfortable with giving Snowflake's valuation that much of a premium due to its business excellence. By winning new customers and getting them to expand their spending over time, the company more than doubled its revenue from fiscal 2021 to fiscal 2022. It's halfway through its fiscal 2023 now. But management has said it aims to increase its revenue by roughly 800% by fiscal 2029 compared to fiscal 2022.
Snowflake's valuation is something to be aware of. However, investors shouldn't dismiss this company on valuation concerns alone because the business is truly capturing a lot of upside from the big data trend.
