We live in a world overflowing with data. The arrival of the internet kicked off the current era of digital data collection. And the onset of cloud computing made the storage and access of this information more efficient.
Now, cloud data company Snowflake (SNOW 8.42%) is making it easy to harness this digital info and take action on the insights provided by it. So it might not be a surprise that Snowflake shares reached a 52-week high of $205.97 on Jan. 23.
With the stock still near its high at the time of this writing, it raises the question: Are Snowflake shares a buy now? The decision to invest isn't straightforward, but digging in for more detail can help arrive at an answer.
NYSE: SNOW
Key Data Points
Snowflake's strength in the zettabyte era of data
Snowflake is in an advantageous position given its specialization in the storage, management, and analytics of data. So much digital data exists in the world today, it's measured in zettabytes, where one zettabyte is equal to a trillion gigabytes.
Because we live in this "zettabyte era" of data, only sophisticated capabilities like those provided by Snowflake can manage this kind of volume. That's because data can come from many sources and in many forms. Among these is what's called unstructured data.
About 80% of the world's data is unstructured, meaning it comes with no predefined structure or format, making it difficult to store and use.
This is a pain point for many businesses, leading to demand for Snowflake's products, which can handle these data challenges. In turn, it's led to spectacular revenue growth for the company.
In its fiscal third quarter, ended Oct. 31, Snowflake generated $734.2 million in sales, 32% higher year over year. This is just the latest quarter in Snowflake's streak of multiyear sales growth.
Data by YCharts. TTM = trailing 12 months.
That growth is set to continue thanks to a rise in its remaining performance obligations (RPOs). RPOs represent the sales contracted with customers to be invoiced and recognized as revenue in future periods.
RPO helps to assess the company's future revenue opportunity. In the fiscal third quarter, its RPO stood at $3.7 billion, a 23% increase over the prior year's $3 billion.
Other considerations with Snowflake
Another tailwind for Snowflake is the secular trend of artificial intelligence (AI). The demand for data is only increasing with this technology's emergence. AI software requires massive amounts of quality data to be fed into its algorithms to execute tasks and make good decisions.
Since Snowflake provides that data, its products are likely to remain in demand as the AI market blossoms over the coming years. As CEO Frank Slootman said: "There's no AI strategy without a data strategy. The intelligence we're all aiming for resides in the data."
Snowflake's revenue growth is impressive, and it's also done well growing its free cash flow (FCF). That provides a look into the cash available to invest in the business, pay debt obligations, and repurchase shares. In the fiscal third quarter, the company's adjusted FCF increased 70% year over year to $111 million.
Yet despite its strong revenue and FCF growth, Snowflake is not profitable. The company exited the fiscal third quarter with a net loss of $214.7 million. Worse, that was an increase from the prior year's net loss of $201.4 million.
Moreover, Snowflake uses other cloud computing providers, such as Microsoft, to operate its platform. These providers can affect Snowflake's ability to achieve profitability, such as by raising prices.
To buy or not to buy Snowflake shares
Along with these risks is the question of whether the stock is a buy at its current price. Now that shares are near a 52-week high, that decision is a bit murky.
One consideration is that shares have been higher. The company's stock debuted in 2020 at $245, so an investment now would put you in a better position than those who bought at the IPO price.
And the average price target for Snowflake shares among Wall Street analysts is $220.79. So there's some upside to be gained if Wall Street's estimates prove correct.
Taking these considerations into account -- as well as the strong demand for data in the AI industry, management's ability to successfully capture that demand in its products, its rising FCF, and the fact stocks are in a new bull market -- these factors combine to make Snowflake a buy. Then, hold on to the shares over the long haul as the AI market grows.
Because the stock soared in recent months, it's best to use dollar-cost averaging when buying. Make a small investment now, then add to your position if price drops occur in the future.
