The stock market has been getting back on its feet -- in fits and starts -- over the past few months following a sharp downturn in 2022 that saw investors hitting the sell button on account of slowing growth, recession fears, rising inflation, and a hawkish Federal Reserve.
The Nasdaq Composite has gained a little over 6% this year, and history tells us that the stock market could run much higher. The S&P 500's median returns in the six months following a bear market stand at almost 23% since 1925. The gains are even stronger, at 38%, in the 12 months following a bear market.
Of course, the past isn't an indicator of future performance, but the cooling inflation and a resilient U.S. economy could give the stock market the fuel it needs to go on a bull run in 2023.
That's why now would be a good time for investors to consider shares of Snowflake (SNOW 3.48%), a fast-growing data warehousing company. The stock has taken a big beating over the past six months, down 33%, which may now provide a good entry point. Let's look at the reasons why.
Investors need to look at the bigger picture
Snowflake stock plunged following the release of the company's fiscal 2023 fourth-quarter earnings on March 1. Investors pressed the panic button as Snowflake's revenue guidance for fiscal 2024 points toward a slowdown while the current quarter's forecast also fell behind Wall Street's expectations.
But a closer look at the company's growth and its long-term potential suggests that Snowflake stock could head higher in the long run. The company exited fiscal 2023 with revenue spiking a massive 70% to $1.94 billion. Snowflake is anticipating 40% revenue growth in the current fiscal year to $2.7 billion, which explains why investors were disappointed following its earnings report.
Snowflake CEO Frank Slootman pointed out on the earnings conference call that the company witnessed "a measure of bookings reticence with certain customer segments in Q4, reflecting a lack of visibility in the business and preferring a cautious short-term stance versus larger, longer-term contract expansions." In simpler words, a dip in customer spending on cloud services is the reason why Snowflake's growth outlook for this fiscal year isn't as outstanding as last year.
That's not surprising, as cloud computing giants such as Microsoft, Amazon, and Alphabet have also witnessed a deceleration in the growth rates of their cloud businesses of late. But investors would do well to focus on the bigger picture as Snowflake is sitting on a massive growth opportunity. The company claims to have a total addressable market worth a whopping $248 billion, which means that it hasn't scratched even 1% of the end-market opportunity based on the revenue it generated last fiscal year.
Not surprisingly, Snowflake is confident of achieving $10 billion in annual revenue by fiscal 2029, which translates into a compound annual growth rate (CAGR) of 31%. The solid top-line growth is expected to filter down to the bottom line as well, with analysts anticipating 66% annual earnings growth from the company for the next five years.
Snowflake is building a healthy business pipeline that should allow it to achieve high growth rates for a long time to come. For instance, the company was sitting on remaining performance obligations (RPO) worth $3.66 billion at the end of the previous quarter, an increase of 38% over the prior-year period. This metric refers to the "amount of contracted future revenue that has not yet been recognized."
The robust growth in Snowflake's RPO can be attributed to a mix of growth in the company's customer count as well as an increment in customer spending. The company had 7,828 customers at the end of the previous quarter, up 31% over the year-ago period. Meanwhile, the number of customers who have spent over $1 million on Snowflake's services in the past year increased a whopping 79% year over year to 330 last quarter.
Given that Snowflake leads the lucrative data warehouse market -- which could be worth $39 billion by itself by 2026 -- with a share of 28%, the company seems to be in a strong position to achieve its long-term revenue growth target.
Why growth investors may want to buy Snowflake now
Snowflake stock is trading at 20 times sales right now. While that's expensive when compared to the S&P 500's price-to-sales ratio of just 2.3 and the system and application software industry's average sales multiple of 7.1, growth investors might still consider buying the stock for a couple of reasons.
First, Snowflake stock is significantly cheaper than where it was a year ago. Second, the company's impressive growth rate means that it can justify its rich valuation, especially considering the mammoth opportunity it is targeting.
SNOW PS Ratio data by YCharts
Snowflake looks like an ideal bet for investors on the hunt for a growth stock given its sharp decline in the past year, its ability to deliver rapid growth for a long time to come, and the potential arrival of a bull market that could help the stock regain its mojo.
