Buzz about artificial intelligence (AI) has kicked into overdrive this year, as consumers and investors alike have been transfixed by advancements in next-generation chatbots.
Natural language processing tool ChatGPT -- the brainchild of start-up OpenAI -- stunned users with its human-like interaction and ability to hold a conversation, summarize content, write a term paper, and even create apps and write code. This could be just the beginning of the opportunity represented by AI.
"AI should increase the productivity of knowledge workers more than fourfold by 2030," foresees Cathie Wood, CEO of Ark Investment Management. The investment firm's Big Ideas 2023 report estimates that "If [AI] vendors were to capture 10% of [the] value created by their products, AI software could generate up to $14 trillion in revenue and $90 trillion in enterprise value in 2030."
Investors are digging deep, looking for diamonds in the rough, especially among some former rising stars dragged down by macroeconomic headwinds. For their part, analysts are remarkably bullish about the prospects of one former highflier. In fact, if Wall Street is right, this stock is set to soar 244% over the coming 12 months.
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A special little Snowflake
Information is power. To that end, there's been an explosion of data from a growing number of sources over the past decade. Unfortunately, most companies are saddled with oodles of data -- all locked up in different systems and cloud providers -- with no way to make sense of it all. That's where Snowflake (SNOW 0.95%) comes in.
The company's software-as-a-service (SaaS) platform offers a variety of data storage, processing, and analytics that Snowflake says are "faster, easier to use, and far more flexible than traditional offerings." Perhaps as importantly, Snowflake is able to aggregate data from disparate cloud infrastructure platforms and third-party applications and make it all accessible from a single dashboard. Furthermore, Snowflake offers transparent pricing based on how much data a company has stored, rather than charging a fixed subscription fee, which allows customers to scale their use as they grow.
Then, there's the company's AI connection. According to its website, "Snowflake's platform was built from the ground up to support machine learning and AI-driven data science applications." So while the company isn't a pure-play AI company, it does make it easier for customers to leverage AI to help "make better decisions, improve productivity, and reach more customers."
Robust growth
Even in the face of gale-force macroeconomic headwinds, Snowflake has been able to generate robust growth. For its fiscal 2023 fourth quarter (which ended Jan. 31), its revenue of $555 million grew 54% year over year. At the same time, Snowflake's remaining performance obligation of $3.7 billion climbed 38% and it had a net revenue retention rate of 158%. Put another way, existing customers are spending 58% more than they did in the year-ago period.
While Snowflake isn't yet profitable, the company generated free cash flow of more than $205 million, which illustrates that its lack of profits are the result of non-cash charges including depreciation.
Snowflake's impressive customer growth backstops its financial performance. While its total client base grew 31% year over year, customers spending more than $1 million over the trailing-12-month period grew 79%, setting a firm foundation for future growth.
Wall Street is overwhelmingly bullish on Snowflake
Like many other technology stocks, Snowflake has been punished as the result of the downturn, even as the company continued to grow. Many on Wall Street believe the selling has gone too far.
According to a consensus estimate of 44 analysts covering Snowflake, the stock carries a median price target of $181. That suggests potential gains for investors of 25% compared to Snowflake's current stock price. However, the Street-high price target of $500 suggests this AI stock could soar as much 244% from over the coming year. Furthermore, of the 44 analysts who cover Snowflake, 28 rate it a buy or strong buy and only one recommends selling -- citing the ongoing macro headwinds. For investors with a long-term mindset, this likely represents an opportunity.
While Snowflake has never been cheap, the recent downturn made it much more affordable. The stock is currently selling for 12 times next year's sales, its cheapest valuation ever.
With the digital transformation and AI boom as catalysts, combined with a deeply discounted valuation, and a rousing endorsement from Wall Street, now is likely a great time to buy Snowflake stock ahead of the inevitable stock market rebound to come.
