As the frosty chill of winter gives way to spring, Snowflake (SNOW -0.34%) is heating things up in the data warehousing industry. Specifically, the company recently announced a flurry of advancements related to artificial intelligence (AI).
Investors need to understand how these developments could impact Snowflake's position in the market, weighing their long-term business promise against the risks that come from Snowflake's high valuation.
Water and snow: Snowflake and H2O.ai
Earlier this year. Snowflake announced a partnership with H2O.ai, a privately held AI cloud company, to bring automated machine learning to their Telecom Data Cloud.
This collaboration aims to help telecommunications service providers accelerate digital transformation, enable superior customer experiences, and maximize operational efficiency. H2O.ai's pre-built suite of applications helps businesses use machine learning to maximize customer profitability and minimize churn, with predictions available to applications built on top of Snowflake.
And if you're not terribly impressed by Snowflake partnering up with a company that hasn't even entered the stock market yet, you should know that H20.ai comes with a sterling pedigree of early investors. The company has raised more than $250 million from in pre-IPO funding deals, suggesting an off-market valuation of at least $1.7 billion.
The company has collected large funding bets from mega-banks Goldman Sachs (GS 0.15%) and Wells Fargo (WFC 0.29%), as well as high-performance semiconductor designer Nvidia (NVDA -0.93%). All three of these household names have invested in H20.ai more than once. In the long run, Goldman, Wells Fargo, and Nvidia expect to make a profit on their early funding moves. This cloud-based machine learning expert looks like a future giant in business-oriented machine learning, and Snowflake includes its robotic smarts in its big data analytics services for telecom customers. Other industries may follow over time.
Snowballing AI powers through buyouts
The company is also expanding its AI in-house powers through straight-up acquisitions.
In January, Snowflake picked up Myst AI, a time series forecasting platform provider. This buyout gives Snowflake's machine learning capabilities expertise an instant shot of adrenaline, furthering the company's strategy to build machine learning features into its data cloud.
Meanwhile, Snowflake's financial engines are running on heavy fuel. Q4 results showed a 54% year-over-year growth in product revenue, with the company guiding for 40% growth in FY 2024. That's a dramatic slowdown, but even the lower growth rate is quite impressive.
Despite the high-octane growth, Snowflake's stock remains pricey, trading at 22 times sales. That's roughly in line with Nvidia's price-to-sales ratio of 25 -- the highest reading among all S&P 500 components today. These stocks are hovering in rarefied air, folks.
With valuation ratios this high, the exact rate of revenue growth often matters less than whether the growth is accelerating or slowing down. That's why Snowflake's stock price is down 35% over the last year and 67% from its all-time highs in November 2021. Snowflake is approaching larger clients with stricter budget requirements nowadays, and the risk-averse mood of the economy also holds back spending patterns in IT departments everywhere.
Snowflake's chill-inducing valuation
While Snowflake has set ambitious goals for its AI-infused data warehousing services, including $10 billion in annual product revenue by fiscal 2029, its slowing revenue growth rate and high valuation may limit the stock's upside potential.
The high valuation might seem reasonable given the rambunctious top-line growth trend, but the stock's upside is weighed down by macroeconomic factors. High-priced growth stocks are not exactly market darlings right now and investors want to see the end of both raging inflation and inflation-fighting interest rate hikes before they can rotate back from value stocks toward higher-growth tech plays again.
So Snowflake is stuck in a weird limbo right now. Its evolving package of AI tools could boost the company's annual sales from $2 billion to $10 billion over the next six years, but the stock price has plunged in recent months due to an inflation-based slowdown.
Snowflake's AI-driven partnerships and acquisitions are reshaping the data warehousing industry and showcasing the company's innovative approach to integrating AI into its offerings. However, that doesn't necessarily turn the stock into a no-brainer buy right now. Investors should be cautious as the high valuation and lower top-line growth rate may temper the stock's performance for the foreseeable future.
A slippery slope: weighing Snowflake's prospects
Buying Snowflake shares right now, you should expect plenty of unexpected twists and turns as the market evolves while the economy gets back on its feet. If sudden jumps and crashes make you reach for the nearest bottle of hypertension reducers, Snowflake probably isn't the stock for you.
Whether you're adding Snowflake to your portfolio right away or waiting for a better price, there's no denying that the company is interesting and its long-term prospects look quite robust. If nothing else, you should keep a close eye on Snowflake as they continue to incorporate AI into their solutions and navigate the ever-changing economic landscape.
