Shares of cloud-native data warehouse specialist Snowflake (SNOW 0.73%) have tanked nearly 32% in 2024 and almost 43% from their 52-week high in February 2024.
NYSE: SNOW
Key Data Points
Snowflake surpassed consensus revenue estimates but missed earnings estimates in the first quarter of fiscal 2025 (ending April 30, 2024). Snowflake's first-quarter net revenue retention rate of 128% was also lower than 131% in the fourth quarter of fiscal 2024 and the peak of 179% at the end of fiscal 2022. Besides, Snowflake's investors are still skeptical about the sudden resignation of CEO Frank Slootman and his replacement by Sridhar Ramaswamy. The major data breach in April 2024 has further adversely affected investor sentiment for the company.
Despite these headwinds, there is still a lot to like about this cloud-based enterprise software company, known to provide large clients with a scalable, secure, and cloud-provider-agnostic solution to aggregate data from multiple sources (including on-premise infrastructure and multiple cloud providers such as Amazon's AWS, Alphabet's Google Cloud, and Microsoft's Azure).
Here are three reasons investors should consider picking at least a small stake in this stock and holding it for the next decade.
Healthy financials
Snowflake has long been known for its explosive top-line growth rates, like year-over-year growth of 120% in fiscal 2021 and 106% in fiscal 2022. Snowflake's fiscal 2025 year-over-year product revenue growth guidance of 24% -- although more than the previous 22% guidance -- pales in front of such historical numbers. However, this should be an expected trend as the company's revenues stabilize and the base becomes larger.
Management has guided for a drop in non-GAAP gross margin from the previous prediction of 76% to 75%. Projections for adjusted operating margin also fell from 6% to 3% for fiscal 2025.
This change is mainly associated with the company's rising investments in GPUs for AI initiatives such as Cortex, Document AI, and Snowpark. While this may prove a headwind in the short run, these AI capabilities can unlock new revenue opportunities in the coming years.
Snowflake has also seen an impressive 46% year-over-year growth in remaining performance obligations (RPO, order backlog indicative of future revenue growth potential) to $5 billion at the end of the first quarter. Hence, it is obvious that the company has significant business commitments for the coming months. Management has also noted a renewed client interest in larger deals, as evidenced by the $100 million deal signed in the first quarter and a much bigger $250 million deal signed in the previous quarter.
Furthermore, while Snowflake is not yet profitable on a generally accepted accounting principles (GAAP) basis, it reported a healthy 44% non-GAAP free-cash-flow margin in the first quarter -- highlighting the company's capacity to generate robust cash flows from its operations. The company also ended the first quarter with $4.5 billion in cash and investments, giving it significant financial flexibility to invest in growth initiatives.
Robust AI initiatives
With large amounts of data essential for training and running AI models, Snowflake is well poised to help clients benefit from the ongoing AI revolution. The company launched the Cortex AI platform last year to help clients to build AI applications using large language models and proprietary data without the need for extensive coding. Cortex AI helps improve productivity by reducing time-consuming tasks across multiple use cases including sentiment analysis, data extraction or summarization, image analysis, automated customer support, and universal search or enabling employees to search data using natural language.
Since its general availability in the first quarter, Cortex AI has already been adopted by more than 750 customers. The company has also developed its large language model called Arctic, which has proved superior to many leading open models across multiple benchmarks at a fraction of the cost. Snowflake aims to leverage these AI technologies to bridge structured and unstructured data in its enterprise data management and collaboration platform.
Expanding total addressable market
Snowflake is rapidly expanding its total addressable market by advancing its capabilities. The company will make support for the open-source Apache Iceberg data storage (a structured interoperable format) generally available later in fiscal 2025.
Many customers have 100 or 200 times more data in data lakes or cloud storage as compared to Snowflake. The support will enable Snowflake to handle a much larger data footprint than before. Some customers may shift data from the Snowflake platform to Iceberg format to run their applications, affecting the company's revenues. However, most customers may prefer to run Snowflake applications directly on top of the Iceberg data. This can enable the company to pitch and win new use cases in areas such as data engineering or AI.
Additionally, the upcoming general availability of Hybrid Tables will further enable it to run transactional workloads on top of Snowflake data.
Valuation
Snowflake is trading at a price-to-sales (P/S) ratio of 14.8 times, significantly lower than its trailing-12-month multiple of 20.4 times.
While it's impossible to make accurate long-term projections for Snowflake, we can make a reasonable guess based on consensus analyst estimates. Analysts expect Snowflake's revenues to grow more than 6.5 times from $2.8 billion in fiscal 2024 (ending April 30, 2024) to $18.4 billion in fiscal 2034 (ending April 30, 2034). Assuming that the P/S multiple remains at its current depressed level of 14.8 (it is at the lower end of what it has been since the company went public in 2020), we can expect the company's market capitalization to be approximately $272 billion by the end of fiscal 2034.
Hence, compared to Snowflake's current market capitalization of $45.2 billion, market capitalization may be just over six times that by 2034. Subsequently, in the absence of any major share repurchases or stock split, the company's share price can grow nearly six times in the same time frame, under reasonable estimates.
Hence, considering the significant pros, Snowflake seems to be a smart long-term pick now.
