The cloud computing industry could be about to have an epic 2024, after a "bad" run in 2022 and 2023. Tech researcher Gartner recently predicted that global spending on public cloud services is expected to increase by roughly 20% in 2024 and reach about $680 billion. Cloud infrastructure and platform services are expected to lead the charge in spending growth, driven by generative AI, as organizations around the world have yet another reason to gradually migrate away from legacy IT solutions.
Data -- paired with the proper hardware and related services -- is of course the basic input for any company looking to put its own version of artificial intelligence (AI) to work. This is what has continued to underpin the optimism surrounding Snowflake (SNOW 3.69%). The data cloud platform stock got hot at the end of the year, and finished out 2023 with a nearly 39% rebound, although that did trail the 43% rally for the Nasdaq Composite Index.
Nevertheless, Snowflake is still sitting on a mountain of opportunity as AI fuels stellar cloud industry expansion. Snowflake stock does trade for a hefty premium, though. Is it a top AI stock buy for 2024 and beyond?
About that premium price tag...
For many value investors, Snowflake isn't going to make the cut. As of this writing, shares trade for 103 times trailing-12-month free cash flow and 66 times the average Wall Street analyst prediction for next fiscal year's (the 12-month period that will end in January 2025) free cash flow.
And of course, free cash flow excludes important noncash expenses like employee stock-based compensation (SBC), which dilutes the stock's value for existing shareholders. Generally accepted accounting principles (GAAP) net income and loss (which includes SBC as an expense) is still in the red, and expected to remain there for some time.
Data by YCharts.
However, business valuation is a subjective exercise. Different folks will get different results, based on how they choose to value a business, and differences in financial expectations used as inputs to arrive at said valuation.
But valuations are also highly dependent on context. Snowflake trades for a very high premium based on free cash flow (my preferred metric, with free cash flow-per-share growth my favored metric for measuring shareholder returns over time, since it includes the effect of SBC). Snowflake should trade for a premium, as the market expects this to be an incredibly fast-growing business for many years, and that it will (eventually) generate high levels of profitability.
Data by YCharts.
Nevertheless, high-premium stocks exhibit above-average volatility, because even small changes in growth rates and profit margin ramp-up can send the stock price soaring or plummeting. So how should a growth investor with many years to go until they expect to need the money handle a stock like this? Much as I've explained in the past, I think a dollar-cost average plan is appropriate for most investors looking to build a long-term position in Snowflake.
Back to the AI story
In 2023, all the AI hype was about new data centers and networking infrastructure to accommodate massive flows of information -- the building blocks of any AI model or high-performance app. That benefited Nvidia (NASDAQ: NVDA). It will take some time for that AI infrastructure (which is still being constructed in earnest) to trickle down to revenue for a software platform like Snowflake.
But 2024 could be the year AI starts to take hold on the software infrastructure part of the cloud industry. As that Gartner forecast indicates, general migration of data to the cloud still has a long runway ahead of it, which is Snowflake's core business.
But Snowflake has multiple services that are only just starting to roll out to customers. At a recent investor event, company CFO Michael Scarpelli outlined a few of them:
- Snowpark is a new way for developers to write code directly within Snowflake, so that data doesn't need to be migrated to another location. In other words, bring your software code to your data, not the other way around. Snowpark is only at about a $70 million revenue annual run-rate at the latest report, according to Scarpelli.
- Streamlit enables the building and sharing of apps within Snowflake, complete with data visualization tools to help data scientists and executives alike get a clearer view of business performance. Streamlit just recently became generally available.
- Snowflake received FedRAMP High Authorization on Amazon AWS GovCloud. Snowflake's "Government" and "Education" clouds can now be used to handle the most sensitive unclassified cloud data for federal, state, and local governments.
Snowflake has other product introductions that are also just rolling out to customers in various stages, and all of them feed into this new ecosystem of AI-powered app development. It was a rough 2023, where many customers were concerned with optimizing on Snowflake (a nice way of saying customers were cutting back on spending so they could conserve cash). Product revenue grew "only" 34% in the last-reported quarter that ended in October, and that rate of growth was forecast to be just 29% to 30% in the quarter ended in January.
However, management has said it appears the bulk of the customer optimizations are now in the rearview mirror, setting the stage for a possible reacceleration in growth in 2024. AI could be the driving force behind this. All this means Snowflake is, at the very least, a top cloud and AI stock worth keeping tabs on this year.
