After more than tripling in value since its initial public offering in September 2020, Snowflake's (SNOW 1.65%) stock has fallen on hard times, losing two-thirds of its market cap as investors transitioned away from high-flying growth stocks into more defensive positions.
That's too bad, because as much as the cloud-based analytics software stock can be volatile, Snowflake's specialization in data warehousing has rightfully garnered significant attention and an important following in recent years, meaning investors may want to revisit its stock again.
So long as you have a tolerance for a bit of risk and are investing money you don't need for bills or emergencies over the next three to five years, Snowflake could be a tech stock that fits perfectly into your portfolio.
The long tail of opportunity
The cloud-based analytics software industry has been growing rapidly in recent years, as increasing numbers of companies turn to the cloud to store and analyze their data. Depending upon who's doing the counting, the global cloud-based analytics market is expected to reach as high as $78.5 billion by 2026, growing at a compounded growth rate of 22% annually from 2021's base.
While analysts tend to forecast industry growth expanding at a steep trajectory, at least in Snowflake's case, the enthusiasm could be justified.
One of its unique selling points is its marketplace platform, which allows customers to easily access and analyze data from a wide range of sources, including social media, e-commerce platforms, and databases. The platform also allows customers to share data with external partners, such as suppliers and customers, without having to move the data out of the cloud.
A different way to data analytics
One of the key factors driving Snowflake's growth has been its strong consumption-based business model, which is very different from the subscription-based model of the competition. Where their revenue is recognized over the life of the contract, Snowflake's model allows its clients to have flexibility in timing their consumption, which can both exceed its contract's capacity and extend beyond the term of the contract.
As usage scales and customer satisfaction grows, they re-up the connection with Snowflake, albeit causing a bit of lumpiness when Snowflake recognizes its revenue. We can see just how well its clients prefer the flexibility based on the growth of its revenue over time.
In the just-completed third quarter, Snowflake reported its revenue grew by 66% year over year, with a net revenue retention rate of over 165%. This indicates that the company is effectively getting its existing customers to spend more and also attracting new customers.
Something for everyone
Snowflake's data warehousing business has also been a key contributor to its growth. Data warehousing involves the storage and analysis of large amounts of structured data, such as financial transactions and customer data. Snowflake's cloud-based data warehousing platform allows customers to store and analyze their data in real time, without the need for expensive hardware and IT infrastructure.
In addition to its strong, consumption-based revenue growth and data warehousing business, Snowflake has seen fit to expand into new markets and introduce new products. In 2021, for example, the company announced the launch of its Snowflake Marketplace, a platform that allows customers to easily discover and purchase data sets from a wide range of sources; as well as Powered by Snowflake, an app-based program for customers; while having previously launched the Snowflake Data Sharing platform, which allows customers to share data with external partners in a secure, controlled way.
Ready for the future
Overall, Snowflake's ability to attract new customers (it had 287 customers with trailing-12-month product revenue greater than $1 million at the end of the third quarter) has contributed to strong revenue growth and high net revenue retention rates, while growing its data warehousing business and expanding into new markets and offering products sets it up for a long runway of opportunity.
The growing cloud-based analytics market and increasing demand for data warehousing solutions are expected to drive further growth for the company in the future. It may be recording losses at the moment, but Snowflake seems poised to capture a growing share of a market that has become a necessity for many businesses.