Snowflake (SNOW 3.69%) was one of the hottest tech IPOs of 2020. The cloud-based data warehousing company went public at $120, started trading at $245 per share, and eventually rallied to a record high of $401.89 on Nov. 16, 2021.
At its peak, Snowflake's enterprise value hit $119 billion, a whopping 98 times the revenue it would actually generate in fiscal 2022 (which ended in Jan. 2022). That nosebleed valuation was unsustainable, and the bulls retreated as its growth cooled off and rising interest rates drove investors toward more conservative investments.
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Today, Snowflake's stock trades at about $160 with an enterprise value of $49 billion, but it still isn't cheap at 18 times this year's sales. A lot of the froth has been wiped away, but it trades at a premium because many investors believe it could evolve into a cloud juggernaut like Microsoft (MSFT 1.82%) over the next few decades.
So does Snowflake really have a shot at becoming the next Microsoft? Let's review its plans for the future to decide.
How rapidly is Snowflake growing?
Large organizations often store their data across different computing platforms and software applications. That fragmentation creates inefficient silos and makes it difficult to make data-driven decisions. To break down those barriers, Snowflake pulls all of that data into a centralized cloud-based data warehouse where it can be easily accessed by third-party apps.
The market's demand for Snowflake's services skyrocketed over the past few years. Its product revenue, which accounts for most of its top line, surged 120% in fiscal 2021, 106% in fiscal 2022, and 70% in fiscal 2023. Its number of high-value customers (those that generate more than $1 million in trailing 12-month product revenue) grew more than fivefold from 77 at the end of fiscal 2021 to 402 at the end of the second quarter of fiscal 2024.
But looking ahead, Snowflake only expects its product revenue to rise 34% in fiscal 2024 as many companies rein in their cloud-based software spending to cope with the macro headwinds. That slowdown, along with its overheated valuations, caused Snowflake's stock to slip 9% over the past 12 months as the Nasdaq Composite advanced 26%.
How much longer can Snowflake maintain its momentum?
During Snowflake's investor day presentation last June, management predicted the company could generate $10 billion in product revenue by fiscal 2029, which would represent a compound annual growth rate (CAGR) of 31% from its $1.9 billion in product revenue in fiscal 2023. Management said Snowflake can hit that target by more than tripling its number of high-value customers to about 1,400 by fiscal 2029. It also expects its adjusted gross margin to expand from 75% in fiscal 2023 to 78% in fiscal 2029.
Snowflake management reiterated its revenue and gross margin targets during its investor day presentation this June, but it also raised its adjusted operating and free cash flow (FCF) margin goals for fiscal 2029 by five percentage points to 25% and 30%, respectively. That expansion suggests economies of scale will kick in as Snowflake locks in more high-value customers.
If Snowflake is still trading at 18 times sales while generating more than $10 billion in revenue in fiscal 2029, it could be worth over $180 billion -- which would be more than triple its current enterprise value.
But will Snowflake be comparable to Microsoft?
Snowflake's stock might still have room to run, but it certainly won't join the same weight class as Microsoft, which has an enterprise value of $2.4 trillion, by the end of the decade.
Furthermore, Snowflake doesn't own its own cloud infrastructure platform like Microsoft's Azure, Amazon Web Services (AWS), and Alphabet's Google Cloud Platform (GCP). Instead, it runs its services on Azure, AWS, and GCP -- which is ironic, because all three of those platforms compete against Snowflake with their own data warehousing services. In other words, Snowflake pays recurring cloud hosting fees to its biggest competitors.
So over the long term, Snowflake might need to build its own cloud infrastructure platform to support its expanding cloud ecosystem and decouple itself from its biggest competitors. If that happens, we could see Snowflake expand and evolve into a diversified cloud infrastructure and services provider that can be more accurately compared to Microsoft.
Yet Snowflake's own growth targets for fiscal 2029 suggest that costly transformation won't happen anytime soon. There's a tiny chance that Snowflake could eventually grow into the next Microsoft in the distant future, but it won't be worth discussing until it grows beyond its core market. For now, investors should focus on Snowflake's fiscal 2029 goal and its ability to keep pace with Microsoft and its peers in the data warehousing space, and not its possible evolution into the next tech titan.
