There's a compelling argument that 2023 will go down in history as the year artificial intelligence (AI) came of age. The ability of generative AI to eliminate repetitive tasks, summarize data, and even simplify code writing has businesses scrambling to profit from the promise of increased productivity.
Experts are still probing the potential represented by AI, and estimates vary wildly. "AI should increase the productivity of knowledge workers more than fourfold by 2030," predicted Cathie Wood, CEO of Ark Investment Management. The company'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 ... in 2030."
Because of the potential for significant gains, investors are searching far and wide to uncover candidates positioned to benefit from the AI gold rush. This is especially true for stocks whose prices are still reeling from the downturn. As a result, analysts are remarkably bullish about the prospects of one former high-flyer and investor favorite. In fact, if Wall Street has it right, this stock could soar as much as 223% over the coming 12 to 18 months.
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An explosion of data
"Knowledge is power," or so the old saying goes. Over the past decade or so, there's been a tidal wave of data from a growing number of sources over the past decade. Some reports suggest that 99% of data has been produced over the past 10 years -- and the veritable explosion of data will only accelerate from here.
Companies can mine their respective information sources to develop actionable data, but with so many silos, systems, and cloud providers, it's nearly impossible to aggregate it in order to make sense of it all. Fortunately, Snowflake (SNOW -5.36%) has the answer for that.
The company's data warehouse offers a wide range of data processing, analytic, and storage solutions that Snowflake says are "faster, easier to use, and far more flexible than traditional offerings." Because its database engine was custom-built for the cloud, Snowflake can aggregate data that runs the gamut from third-party applications to cloud infrastructure platforms, making it all accessible through a central dashboard. Perhaps as important to users, Snowflake's transparent pricing is based on the volume of data storage, so it doesn't charge a fixed subscription fee. This allows customers of all sizes to pay for what they need and scale their use as they grow.
Snowflake recently expanded existing agreements with Microsoft, Amazon Web Services, and Nvidia to bring the power of large-scale custom generative AI models and machine learning capabilities to the masses. These partnerships will give businesses to tools they need to build custom large language models (LLMs) that form the foundation for generative AI. Adding AI functionality to the mix will take the usefulness of this data to the next level and will likely be a boon to Snowflake's business.
Enviable growth
Even amid the worst downturn in over a decade, Snowflake delivered enviable growth. For its fiscal 2024 first quarter (ended April 30), revenue grew 50% year over year to $590 million. At the same time, Snowflake's remaining performance obligation (RPO) of $3.4 billion rose 31%, while its net revenue retention rate of 151% illustrated that existing customers are spending 51% more than they did in the same period last year.
It's worth noting that while Snowflake isn't yet profitable, the company generated strong and growing operating and free cash flow of $299 million and $283 million, respectively, evidence that its lack of profits is the result of non-cash charges, including depreciation -- and ongoing profitability is merely a matter of time.
Snowflake's robust user growth underpins its strong financial performance. While its total customer count of 8,167 grew 29% year over year, customers spending more than $1 million over the preceding 12 months grew 80%, setting the company up for future success.
Wall Street is overwhelmingly bullish on Snowflake
Like many technology stocks, Snowflake fell hard last year, losing 58% of its value, even as the company continued its robust financial growth. Many on Wall Street believe the selling is overdone.
A consensus estimate of the 45 analysts that follow Snowflake results in a median price target of $195. That suggests potential gains for investors of just 4% compared to Snowflake's current stock price. However, the Street-high price target of $600 suggests this AI stock could soar as much as 223% over the coming year to 18 months. Furthermore, of the 45 analysts that cover Snowflake, 29 rate it a buy or strong buy, and only one recommends selling -- citing its high valuation and the resulting potential for downside.
To be clear, Snowflake has never been cheap selling for a lofty multiple even at its IPO. However, the stock is currently selling for 17 times next year's sales, near its most reasonable valuation ever.
With the digital transformation and AI gold rush as catalysts, combined with a historically low valuation and a ringing endorsement from Wall Street, now is a great time to buy Snowflake stock ahead of the inevitable recovery to come.
