A weak revenue outlook in Snowflake's (SNOW +0.04%) last business update sent the stock price sharply lower. The share prices are down 20% year to date, but analysts at KeyBanc see a buying opportunity.
KeyBanc initiated coverage of the stock with an overweight (buy) rating and a $185 price target, which are usually projections for where the stock might trade in the next 12 months or so. The new price target represents a 16% upside from Thursday's close. The firm likes the cloud provider's prospects as companies continue migrating legacy data systems over to the cloud.
NYSE: SNOW
Key Data Points
Why buy Snowflake stock
Snowflake reported product revenue growth of 33% year over year in the fourth quarter, which would seem strong enough to support the stock's valuation, but management's guidance calls for growth to slow to 26% to 27% year over year in the first quarter.
The stock's sell-off should reset expectations and set the stage for better returns. KeyBanc believes the company will keep its long-term growth rate stable at 20% due to ongoing migrations to cloud services.
Indeed, the cloud market is still a massive long-term growth opportunity. Worldwide spending on cloud infrastructure services totaled $290 billion in 2023, according to estimates at Canalys, and it's expected to grow 20% in 2024, compared to 18% in 2023. This should provide a nice tailwind for Snowflake's business, especially as companies look for more efficient ways to manage data in preparation for the use of artificial intelligence.
Snowflake has experienced a significant deceleration in top-line growth over the last few years, but as revenue growth settles in the 20%-plus range, investors will likely shift their focus to Snowflake's improving profitability. The stock was trading at a fair valuation before the sell-off, so the analyst's price target seems reasonable as Snowflake continues to grow.
