Everyone wants life-changing investments. Of course, they're not easy to find. Legendary investor Peter Lynch once compared investing to turning over rocks, believing the person who turned over the most won. Lynch's analogy was just another way of emphasizing the importance of diversifying your portfolio. Another investing tip Lynch emphasized was that winning stocks generally have things in common.
A massive runway for many years of growth is one such commonality. Data platform Snowflake (SNOW 3.69%) scores well in that regard. The company is a behind-the-scenes cog of an artificial intelligence (AI) revolution that could create dramatic wealth for people over the coming years. Let me explain.
Snowflake's role in artificial intelligence
Most AI models need two primary ingredients: computing power and data to analyze. Snowflake is a cloud-based platform offering data storage and analytics. Data is vital in developing a robust AI model, but most companies don't know how to organize, secure, or analyze the mounds of data they gather from their operations. It's often gathered in multiple formats and/or stored on multiple systems that don't always sync well.
Snowflake solves these problems. Companies can dump their various data into Snowflake's servers, where it's organized and stored by the platform. Users can then run queries to find what they want from their data. Additionally, Snowflake has built a marketplace where customers can share and purchase third-party data.
For AI, that means building more extensive and more usable data sets. Better data means better-trained AI models. Snowflake recently began integrating generative AI into its platform. It acquired three companies to help flesh out its AI features:
- Neeva, an advanced search engine for querying data.
- Streamlit, a developer platform for building and testing AI apps.
- Applica, which uses machine learning to sort data.
Snowflake wants to use AI to help its customers maximize the value of their data by guiding them to the right data and insights, instead of leaving customers to take shots in the dark.
Snowflake has a business model built for long-term growth
That's all good, but investors want to see how Snowflake's technology translates to investment returns. Fortunately, Snowflake's business model is built with long-term growth in mind. For example, Snowflake charges on a usage basis. It separates storage and computing resources and charges for what's used, letting customers scale up and down as needed.
But this works in Snowflake's favor over time because data is exponentially growing. Did you know the world created, copied, and consumed two zettabytes by 2010? That's grown 60-fold as of 2023, hitting 120 zettabytes. That will grow to roughly 181 by 2025, just two years later. How much data will the world use by 2030? 2040? 2050?
The usage-based billing means that while growth will fluctuate at times, it will almost assuredly head higher over time. That is reflected in Snowflake's fantastic 135% net revenue retention (NRR) rate, which means Snowflake customers spend increasing amounts on the platform. Additionally, the company's customer count grew 23% year over year in the fiscal third quarter of 2024, ended Oct. 31, 2023, to 8,907.
Nine thousand businesses is nothing. Will every company need Snowflake's services? Probably not, but considering there are 333 million companies worldwide, that's likely years of customer growth without running out of real estate.
Putting numbers to it
Snowflake has only been public for three years, but a lot has happened in that time. The economic climate has changed significantly. You can see below that the Federal Open Market Committee's aggressive rate hikes to slow inflation coincided with dramatically slowing revenue growth for Snowflake. Customers are more cautious about spending. Management has pointed this out in earnings calls.
Declining market sentiment and slowing growth have acted as gravity, pulling Snowflake's valuation back to earth. Its price-to-sales ratio was once over 175, an irresponsible valuation for anyone to pay, down to roughly 25 times revenue. That's still not cheap, but it's at least realistic.
SNOW PS Ratio data by YCharts
Will growth speed back up? One could argue that it will as rates eventually ease and companies spend more. But even if revenue never grows at triple digits again, the long-term direction is still up because of the discussions above. Analysts believe Snowflake's revenue will grow from under $3 billion to over $17 billion over the next eight years.
Even if you cut Snowflake's P/S ratio in half again, to 12, that's a market cap of $204 billion based on 2031 revenue estimates. Snowflake is worth $65 billion today, so that's an over threefold return in just over seven years. A trillion-dollar market cap isn't impossible if AI and big data become a multidecade growth story.
A highflier like Snowflake in a diversified portfolio? Yep, that growth will help any long-term investor become a millionaire.
