If you've looked into artificial intelligence (AI), one thing is clear: The more data you have, the better trained your model will be. However, collecting data and structuring it so it's usable is a challenge in its own right.
With many companies sitting on a gold mine of information without compiling it to be used, they are turning to Snowflake (SNOW 3.69%) for help. Since going public, Snowflake has been one of the fastest-growing companies on the market, which even inspired Berkshire Hathaway to take a position in the stock before it hit the public markets.
Snowflake has also had a strong couple of months, rising from about $140 per share to $200. So, is this the start of an even larger movement? Or should investors be wary? Let's find out.
Data is crucial for many applications
Snowflake helps its clients establish a data cloud. Because it's cloud agnostic, its users can store data on whichever cloud infrastructure they'd like, or they may choose to spread it across providers to eliminate a single point of failure or prevent these companies from locking them into expensive contracts. Snowflake's software optimizes the storage of all data types, including unstructured and semi-structured, so that its users pay the cloud-computing companies less.
From there, Snowflake has multiple tools that allow the data owners to utilize the data flows to inform other programs, perform data science to discover new insights, or sell the data on the Snowflake marketplace.
That last capability is key for AI proliferation, as a company may be trying to develop an AI model for an e-commerce store but may be missing data from a target demographic. With the Snowflake marketplace, it can help users find data and seamlessly integrate it into another data set.
Snowflake's customers also love the product, as it posted a 100% Dresner customer satisfaction score for the sixth consecutive year. Among its clients are 647 of the Global 2000, with 436 customers who spend at least $1 million annually with Snowflake, up 52% year over year.
However, one metric that may concern investors is its slowing growth.
Snowflake is a long way away from breaking even
Snowflake is still a high-growth company, but its rates aren't nearly what they used to be.
SNOW Revenue (Quarterly YoY Growth) data by YCharts
While 32% year-over-year revenue growth is respectable, it's concerning because Snowflake isn't even close to breaking even. In Q3, Snowflake's operating loss was $261 million -- a 36% loss margin. Compared to last year's Q3 operating loss margin of 37%, Snowflake has made no progress in achieving profitability.
But Snowflake management doesn't buy that analysis. Instead, it wants investors to disregard stock-based compensation, a non-cash expense. If you remove this from the equation, Snowflake suddenly turns profitable and increases its margins.
| Period | Operating Profit (Less Stock-Based Compensation) | Adjusted Operating Margin |
|---|---|---|
| Q3 FY 2023 | $34 million | 6.1% |
| Q3 FY 2024 | $46 million | 6.3% |
Data source: Snowflake.
With stock-based compensation rising at about the same pace as revenue (31%), Snowflake clearly shows no interest in becoming a profitable business in the short term. While this may concern some investors, it's not a big deal for others. That's because Snowflake is still growing quickly and attempting to capture a vital market opportunity.
As a result, the stock has a premium valuation based on its massive potential.
SNOW PS Ratio data by YCharts
With the stock approaching previous valuation highs, I think now isn't the best time to purchase Snowflake stock. The expectations are quite elevated, and if you can be patient enough to wait for the valuation to come down to around 20 times sales, it would be a much better investment opportunity than the expensive 24 times sales it trades at now.
But if you come in with a five-year mindset, the price tag you pay today may be worth it, as significant growth will drive the stock price higher, making the premium you paid for it today worth it.
