By some standards, Snowflake (SNOW 3.69%) stock has underperformed so far in 2023. It's up just 29% year to date, while the tech-heavy Nasdaq Composite index has clocked a gain of 37% -- though both are outpacing the broad market S&P 500, which is up by about 20%. That's good, but what is even better is that the cloud-based data platform provider's share price growth could accelerate in 2024, particularly given what it revealed in its latest earnings report.
Snowflake stock surged more than 7% in the session after the company released results for its fiscal 2024 third quarter, which ended Oct. 31. Let's see why that was the case and check why this cloud stock could sustain its momentum in 2024 and head higher.
An improving customer spending environment
Snowflake's revenue increased 32% year over year to $734 million in fiscal Q3, exceeding analysts' $714 million consensus estimate. That impressive growth was driven by a 34% year-over-year increase in the company's product revenue to $698.5 million. Snowflake's product revenue measures the use of the company's cloud-based platform by its clients, capturing "the consumption of compute, storage, and data transfer resources."
It is worth noting that Snowflake charges its customers on a consumption-based model instead of a subscription-based model. So stronger-than-expected growth in product revenue means that customers are making more use of the company's platform.
Snowflake also reported an adjusted loss of $0.65 per share, compared to analysts' consensus expectation of a $0.76 per share loss. Management's guidance update was the icing on the cake: The company expects its product revenue to increase by 29% to 30% in fiscal Q4 to a range of $716 million to $721 million, well ahead of the $696 million consensus estimate.
More importantly, Snowflake has raised its full-year product revenue guidance to $2.65 billion, which would translate into a 37% increase over last fiscal year. It was previously forecasting that product revenue would increase by 34% in fiscal 2024 to $2.6 billion, but the company's "strong execution in a broadly stabilizing macro environment" has encouraged it to raise its outlook.
A closer look at some of the key metrics from Snowflake's quarterly report tells us that the end-market scenario is indeed improving. For instance, the company finished the quarter with 8,900 customers, up almost 24% from a year earlier. More importantly, the number of customers who have generated more than $1 million in product revenue for Snowflake in the trailing 12 months increased at a much faster pace of 52% to 436.
This combination of a growing customer base and an increase in customer spending led to a 23% year-over-year increase in the company's remaining performance obligations (RPO) to $3.7 billion. This metric refers to contracted future revenue that hasn't been recognized yet. So Snowflake has built a solid future revenue pipeline, which explains why analysts anticipate the company will sustain healthy levels of growth over the next couple of fiscal years following an expected 33% increase in revenue in fiscal 2024.
SNOW Revenue Estimates for Current Fiscal Year data by YCharts
Assuming the company does hit $3.6 billion in revenue in fiscal 2025 and trades at 20 times sales -- a discount to its current price-to-sales ratio of 23 -- its market cap could hit $72 billion. That would be an 18% jump from current levels. Snowflake can justify the rich sales multiple on the back of the impressive growth that it has been delivering, as well as a lucrative end-market opportunity that could send the stock soaring in the long run.
Built for robust long-term growth
Snowflake's data cloud solution allows customers to consolidate their data onto a single platform. They can then use that data to build applications and products, or gain business insights. The company anticipates that demand for its offerings will boom massively in the long run.
At its investor day presentation in June, management pointed out that Snowflake's total addressable market was worth $140 billion in 2022. By 2027, it expects that number to rise to $290 billion. Based on that, Snowflake's annual revenue forecast for the current fiscal year suggests that it is at the beginning of a huge growth curve.
This explains why the company expects its product revenue to nearly quadruple over the next five years to $10 billion in fiscal 2029. If Snowflake hits its estimated revenue target, a sales multiple of even 15 after five years would result in a market cap of $150 billion, which would be a 145% increase from current levels.
It is also worth noting that Snowflake's current sales multiple is slightly lower than its 2022 average of 24, and its top line has headed higher in the meantime.
SNOW PS Ratio data by YCharts.
As such, investors looking to buy a growth stock may want to act quickly, as Snowflake could turn out to be a winner thanks to the solid customer base that it is building and the huge addressable opportunity it could benefit from.
