Snowflake (SNOW 1.80%) was one of the hottest growth stocks in 2020 and 2021. The cloud-based warehousing company went public at $120 per share in September 2020, and its stock more than doubled to $245 on its very first trade.
Snowflake's stock eventually hit an all-time high of $401.89 in November 2021. That gave it a market cap of $122.9 billion, a whopping 102 times the $1.2 billion in revenues it would generate in fiscal 2022 (which ended in January 2022).
But as of this writing, Snowflake's stock trades around $145 per share with a market cap of $46.6 billion. It still isn't cheap at 23 times this year's estimated sales of $2.1 billion, but that might be a reasonable valuation relative to its growth rates. Between fiscal 2019 and fiscal 2022, Snowflake's annual revenue grew at a jaw-dropping compound annual growth rate (CAGR) of 133%. But can it maintain that momentum over the long term and become a trillion-dollar stock by 2030?
Image source: Getty Images.
Why is Snowflake growing so rapidly?
Large organizations often store their data across a wide range of computing platforms and software applications, but those fragmented silos can make it tough to make data-driven decisions. Snowflake breaks down those silos, aggregates all of that fragmented data, and stores it in a centralized cloud-based data warehouse where it can be easily accessed by third-party applications and data visualization services like Salesforce's Tableau.
Snowflake isn't the only cloud-based data warehouse in town. Amazon (AMZN -0.63%) and Microsoft (MSFT 1.22%) integrate similar services (Redshift and Azure Synapse, respectively) into their cloud infrastructure platforms.
However, Snowflake stands apart from those competitors because it works with a wide range of cloud computing platforms instead of locking its clients into a single ecosystem. It also splits its storage and computing platforms into stand-alone usage-based services, so companies only pay for the computing power they need instead of paying recurring subscriptions.
That flexibility made Snowflake a popular choice for companies that didn't want to tether themselves to Amazon, Microsoft, or other public cloud giants. Snowflake only served 1,547 customers at the end of July 2019. That figure had risen nearly five times to 7,292 at the end of the third quarter of fiscal 2023 last October.
Can Snowflake maintain that momentum?
Snowflake won't keep generating triple-digit growth through the end of the decade, but it could still grow much faster than many software companies. Last June, Snowflake predicted its product revenues (which account for most of its top line) would soar from $1.14 billion in fiscal 2022 to about $10 billion in fiscal 2029, which would equal a CAGR of 36%.
It expects that growth to be driven by a higher mix of larger customers, which generate over $1 million in trailing-12-month product revenue. It expects around 1,400 of its customers to belong to that high-value cohort in fiscal 2029, compared to only 287 customers in the third quarter of fiscal 2023.
That's a bold forecast, but Snowflake's high net revenue retention rate, which gauges its year-over-year revenue growth per existing customer, supports that bullish thesis. That key growth metric still came in at 165% in the third quarter, compared to 171% in the second quarter and 173% in the year-ago quarter.
It's highly unusual for a tech company that generates more than $1 billion in annual revenue to report such a high retention rate. For example, Datadog (DDOG 1.02%) -- another silo-busting hypergrowth company that is expected to generate $1.7 billion in revenues this year -- merely aims to keep its retention rates above 130%.
So could Snowflake become a trillion-dollar company?
If Snowflake generates $10 billion in revenues in fiscal 2029, then grows its revenue by 30% to $13 billion in fiscal 2030, it could easily generate some multibagger gains. However, its valuations will likely prevent it from joining the 12-zero club.
If Snowflake generates $13 billion in revenues in 2030 and still trades at 20 times sales, it would be worth $260 billion -- a near-six-bagger gain from its current market cap. But if its price-to-sales ratio cools to 10, which arguably seems more realistic for a company that generates 20% to 30% sales growth, it would only be worth about $130 billion.
That would be triple its current valuation, but it might disappoint investors who expect Snowflake to become a trillion-dollar company which is comparable to the top FAANG stocks in just a few years. That's because a lot of growth has already been baked into Snowflake's stock at its current prices -- and it needs to keep dazzling investors to maintain its premium valuation.
