The S&P 500 (^GSPC 1.33%) soared by 34% during the past year, and the index currently trades near its record high. However, Keith Weiss at Morgan Stanley still sees plenty of potential upside for Snowflake (SNOW +1.61%) shareholders in the next 12 months. His bull-case target of $330 per share implies an upside of 103% from the current price of $162 per share.
Investors should never rely too heavily on any individual analyst's price target on a company, and even Wall Street's consensus targets should be viewed cautiously. But Snowflake warrants further consideration. Its business sits at the intersection of two secular trends -- artificial intelligence and data analytics -- and shares currently trade at a reasonable valuation relative to its growth prospects.
NYSE: SNOW
Key Data Points
Snowflake has a compelling value proposition for customers
Snowflake lets businesses ingest, transform, store, and analyze data. Its platform also supports application development and secure data sharing. That last point is important because it creates a network effect that makes the platform increasingly valuable as more clients upload more data. Data sharing also positions Snowflake as a key beneficiary of artificial intelligence (AI), simply because the amount of data available for training machine learning models is a limiting factor in their development.
Snowflake has another important advantage besides its ability to consolidate workloads. Its platform is cloud agnostic, meaning it runs across all three major public clouds: Amazon Web Services, Microsoft Azure, and Google Cloud. None of those vendors offer the same flexibility, which gives Snowflake an advantage for two reasons. First, Snowflake's clients can easily analyze data across multiple cloud environments. Second, they can switch cloud providers without interrupting their ability to analyze data.
That combination of workload consolidation and cloud-agnostic software is clearly resonating with customers. Forrester Research recently recognized Snowflake as a leader in cloud data warehousing solutions, citing its unmatched innovation as a key strength. Additionally, the company earned a net promoter score of 72 in 2022, more than triple the average score of 21 among competing cloud vendors. Finally, Snowflake has consistently reported exceptional net revenue retention rates showing that its established customers are consistently spending more with the company over time.
A mixed fourth-quarter report
Snowflake reported better-than-expected financial results in the fourth quarter. Its customer count increased 22% to 9,437, and its average existing customer spent 31% more with it over the past year. Revenue rose 32% to $775 million, and non-GAAP (adjusted) net income more than doubled to $128 million.
However, management guided for roughly 27% revenue growth in 2024's first quarter, whereas Wall Street analysts, on average, had been expecting 29% growth. To further complicate matters, CEO Frank Slootman announced his retirement, effective immediately. The combination of light guidance and the leadership change sent the stock tumbling by 20%, and shares have continued to slide lower since then.
However, I think that has created a buying opportunity for patient investors. Snowflake replaced Slootman with Sridhar Ramaswamy, an experienced executive who previously served as senior vice president of advertising and commerce at Google. Upon taking the reins, he immediately identified generative AI as a big opportunity, and Snowflake has already partnered with Mistral AI to make large language models (LLMs) available through its platform.
Specifically, Mistral LLMs will be available through Cortex, a cloud service powered by Nvidia GPUs that lets users build generative AI applications on Snowflake. Cortex is currently in public preview, but it could produce a material revenue stream in the future. This is not only because clients will use the service to build applications, but also because those applications will run on Snowflake infrastructure, increasing resource consumption.
Snowflake is worth buying, but with tempered expectations
Grand View Research forecasts that the data analytics market will grow at an annualized rate of 27% through 2030, and that the artificial intelligence market will expand at 37% annually during the same period. Snowflake is well positioned to benefit from both trends.
Wall Street expects the company to grow sales at an annualized rate of 25% over the next five years. That makes its current valuation of 18.9 times sales appear reasonable. Patient investors should consider buying a small position in this growth stock today, but not with the expectation of triple-digit percentage returns in the next year. That type of outperformance is unlikely in light of management's conservative first-quarter guidance.
