A weak revenue outlook in Snowflake's (SNOW -0.44%) 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.
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.
