Artificial intelligence (AI) is taking the world by storm, and investors are looking for the next underappreciated company that could benefit from this trend. One company that I cover frequently is Snowflake (SNOW 3.69%). Similar to its data analytics cohort Palantir, Snowflake seems to be largely misunderstood by the investment community.
Snowflake specializes in data-as-a-service. But what does that mean? Essentially, the company offers cloud-based infrastructure that can support areas such as data warehouses, data lakes, and machine learning. This is important because businesses of all sizes are investing heavily in digital transformation. And having the ability to share data across an organization and run complex data queries in an efficient fashion is becoming increasingly mission critical.
Snowflake sits in a really unique position, and I view the company as an important pillar holding up the broader AI movement. With these tailwinds, is it too late to buy the stock? Let's find out.
Why Snowflake will be important for AI
One of the more interesting takeaways from Snowflake's second-quarter earnings call was CEO Frank Slootman's comments around customer use cases as that pertains to AI. More specifically, Slootman admitted that even though generative AI is now a prominent talking point with customers and prospects, many have not necessarily identified concrete objectives or projects in which this technology is beneficial. For example, Slootman goes on to describe that integrating large language models (LLM) is quite complex and arduous.
It is not as simple as layering an LLM on top of Snowflake's platform and expecting some sort of transformative evolution of the business. Rather, enterprises need to figure out what problems AI can solve for their specific operations. Then, Snowflake's infrastructure becomes far more appealing. Slootman goes on to say, "[However], enterprises are also realizing that they cannot have an AI strategy without a data strategy to base it on. We have a head start in this race as the epicenter of highly curated, optimized, and trusted enterprise data."
Slootman is trying to convey that while the prospects of artificial intelligence are tempting, businesses must have a flexible and agile data architecture before considering any serious foray into AI. By properly storing data in the cloud, businesses can seamlessly add Snowflake as part of the tech stack in an effort to propel their operation to the next level.
One of the bigger tailwinds I see for Snowflake is its ability to integrate with the three largest cloud providers: Microsoft Azure, Alphabet's Google Cloud, and Amazon Web Services. All three of these giants have invested billions into AI start-ups. Given these pursuits are meant to augment existing innovation strategies and aimed at enhancing customer acquisition, my thesis is that data storage and synthesis will experience pronounced, exponential growth for many years. For this reason, Snowflake could become a even more crucial at the intersection of data-driven insights and AI.
Image source: Getty Images.
Should you invest in Snowflake?
One of Snowflake's more noteworthy investors is the Oracle of Omaha, otherwise known as Berkshire Hathaway CEO Warren Buffett. Buffett is well known for buying large ownership stakes in companies that generate steady earnings, pay dividends, and sometimes operate in mundane industries. Snowflake is not yet profitable on a generally accepted accounting principles (GAAP) basis, it does not pay a dividend, and the tech sector can be quite volatile. Given that Snowflake does not match any of the parameters outlined above, what could possibly convince Buffett to own the stock?
About a year before investing in Snowflake's initial public offering in 2020, Buffett took a stake in Amazon. I feel that his position in Snowflake is merely another brick in a new foundation for Berkshire. While Snowflake has a long road ahead, the secular tailwinds from cloud and AI are hard to deny.
SNOW Price to Free Cash Flow data by YCharts.
The chart above shows that Snowflake is trading over 50% off its prior price-to-free cash flow highs over the last year. While this might look concerning, I see an opportunity. Much of the AI-driven stock market movements have been concentrated in a handful of Big Tech beneficiaries. My stance is that Snowflake experienced sell-offs from investors buying into the hype of Nvidia, Alphabet, Microsoft, Amazon, and Meta in particular. Like Buffett has done countless times throughout his career, I would take a contrarian approach to Snowflake. While some investors may be focusing solely on Big Tech, there are plenty of less obvious opportunities when it comes to AI.
As Slootman suggests, as more businesses realize how important it is to have data stored in such a way that it can be shared within and outside the organization, the big picture will come into focus quickly. LLMs have the ability to process both structured and unstructured data to help companies answer questions and more quickly determine solutions. Snowflake is well positioned to take advantage of this trend and become the market leader for a variety of data services. For these reasons, now could be an ideal time to lower your cost basis and scoop up shares in this Buffett stock.
