Snowflake (SNOW 3.69%) is a leading cloud computing company with a growing portfolio of products to serve businesses in the digital world. It hasn't been an easy ride since its stock came public in 2020 -- although it's trading comfortably above its IPO price of $120, it's still 52% below its best-ever level.
Snowflake has attracted some top-tier investors, including Warren Buffett's Berkshire Hathaway conglomerate, which currently owns a stake worth $1.1 billion.
But should you follow Berkshire's lead? Snowflake just reported its financial results for the fiscal 2024 third quarter (ended Oct. 31), and investors immediately sent its stock 7% higher. But there's a large hurdle that would probably deter most investors -- including Buffett himself -- from buying the stock at the current price.
With that in mind, here are two reasons to buy Snowflake, and one reason to avoid it.
Image source: Getty Images.
Reason No. 1 to buy Snowflake stock: Cloud computing and AI
Cloud computing allows businesses to operate online. It involves them renting computing power from centralized data centers, often managed by tech companies like Microsoft and Amazon.
In 2018, Snowflake launched the Data Cloud, which allowed businesses to connect all of their data, regardless of which cloud provider they were using. It helped businesses break down silos and provided them with powerful analytics tools, giving them the clearest possible insights into their operations.
Snowflake has since launched a portfolio of other platforms, and Snowpark is one of the most notable. Developers within large organizations often use different programming languages to code software, creating fragmented workflows and complex architectures. Snowpark brings them together into one platform, where they can collaborate, no matter the programming language. It speeds up projects and ensures data remains secure in one location.
Now, Snowflake is aggressively breaking into the artificial intelligence (AI) space. It recently launched Cortex, which features three AI-powered tools:
- Document AI uses a large language model (LLM) to help users extract valuable information from unstructured data, like that they would find in a contract or an invoice.
- Universal Search allows users to discover key data and applications using natural language instead of programming language. It builds upon Neeva's technology, which Snowflake acquired earlier this year.
- Snowflake Copilot serves as a generative AI-powered virtual assistant, capable of turning regular text into computer code.
Plus, Cortex includes a host of other LLMs with different functions to help businesses get the most from their data.
Reason No. 2 to buy Snowflake stock: Strong growth
Snowflake continued to grow quickly in the third quarter of fiscal 2024, led by the acquisition of large, high-spending customers. The company's product revenue came in at a record high of $698.5 million, an increase of 34% year over year. It was also comfortably above management's prior forecast of $675 million, and it prompted an increase to Snowflake's full-year product revenue guidance by $50 million (to $2.65 billion).
To be clear, Snowflake's quarterly revenue growth rate has been trending down over the past year amid the challenging economic climate, where businesses are carefully managing their costs. But in his conference call with investors, CEO Frank Slootman said the environment was stabilizing, which could be a sign that Snowflake's growth rate is close to bottoming out.
Plus, at the end of Q3, the company had 436 customers spending a minimum of $1 million per year on its products. That was a 52% jump compared to the year-ago period, which suggests larger organizations are still willing to invest in cloud and AI technologies.
Snowflake also continues to grow its workforce, despite many technology companies slashing jobs over the past year to reduce costs. The company had 6,783 staff at the end of Q3, an increase of 22% year over year. Interestingly, it's adding research and development workers faster than any other category, which highlights management's commitment to expanding its product portfolio to drive future revenue growth.
The reason to avoid Snowflake stock: Its high valuation
Despite the overwhelmingly positive quarterly result, Snowflake's high valuation might be tough for most investors to swallow. Since the company is still losing money, it can't be valued based on its price-to-earnings ratio. Instead, investors can look at its price-to-sales (P/S) ratio, which measures its market capitalization against its revenue.
As I mentioned, Snowflake is on track to deliver $2.65 billion in revenue for the fiscal 2024 full year, which wraps up at the end of January. Based on the company's current market cap of $57 billion, that places its stock at a P/S ratio of 21.8.
For context, Microsoft -- which is home to the Azure cloud platform featuring a leading portfolio of AI products and services -- trades at a P/S ratio of 12.9. Amazon operates the largest cloud platform in the world, and its stock trades at a P/S ratio of just 2.7.
To be clear, Snowflake is growing its revenue more quickly than both of those companies (and their cloud businesses specifically), but that probably isn't enough to warrant such a significant valuation premium. Plus, keep in mind that Snowflake's fiscal 2024 revenue is on track to grow at the slowest annual pace since the company came public, which would normally prompt investors to pay a lesser P/S ratio.
Of course, Snowflake stock has declined 52% from its all-time high, but it's undoubtedly still rather expensive. Investors would have to expect a meaningful acceleration in the company's revenue growth in fiscal 2025 to justify any upside to its stock price from here -- however, Wall Street analysts predict growth will slow to 30% (from 33% in fiscal 2024).
Snowflake is unquestionably a great cloud and AI company, but investors might be better off waiting until its stock falls back to its IPO price of $120 to buy in. I'm not suggesting it will happen, but that's roughly where the legendary Berkshire Hathaway investment company took its position, and there are few better guiding lights in the stock market.
