Cloud-based data warehousing company Snowflake (NYSE:SNOW) has been on a remarkable revenue growth trajectory in recent years. However, Snowflake’s stock hasn’t surged like other AI stocks this year, as its expensive valuation has pushed investors away. Nonetheless, with cloud spending increasing again, Wall Street remains highly upbeat on Snowflake’s long-term cloud and AI prospects, rating it a Strong Buy with plenty of expected upside. Like most analysts, I am bullish on Snowflake stock, too.
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Impressive Revenue Growth Trajectory
Snowflake has quickly emerged as a significant player in the data warehousing space, revolutionizing how businesses manage and analyze their data. What differentiates Snowflake is its highly flexible and scalable platform for data analytics and storage. Its efforts are reflected in its rising product revenue growth in recent years.
Notably, Snowflake’s product revenue, which accounts for a chunk of its total revenue, has increased from $96.7 million in Fiscal 2019 to $1.94 billion in Fiscal 2023. The company expects to generate ~$10 billion in product revenue by Fiscal 2029.
In Q2 Fiscal 2024, Snowflake’s product revenue grew 37% year-over-year to $640.2 million. Perhaps more impressive is Snowflake’s increase in customers (those with more than $1 million in trailing 12-month product revenue) to 402 in the second quarter from 116 in the same quarter in Fiscal 2022.
This rapid expansion may assist the company in meeting its Fiscal 2029 product revenue target. Furthermore, its free cash flow margin is expanding substantially, which is a positive sign for a growing company in a highly-competitive market.
Snowflake doesn’t have its own cloud infrastructure platform yet, but it has collaborated with top cloud providers like Amazon’s (NASDAQ:AMZN), AWS, Alphabet’s (NASDAQ:GOOGL) Google Cloud, and Microsoft’s (NASDAQ:MSFT) Azure to expand its customer reach.
The Future Looks Bright
According to the International Data Corporation, public cloud spending globally could grow at a compound annual growth rate of 20% to reach $1.35 trillion in 2027. Snowflake remains poised to take advantage of this phenomenal growth. With AI moving “beyond enterprise boundaries,” according to CEO Frank Slootman, he believes that data sharing “makes Snowflake uniquely positioned to enable AI workloads.”
Sharing the same optimism, on October 4, capital market company Loop Capital believes Snowflake is poised to reap the benefits from the “emerging AI opportunity as it aggressively builds out its platform.” Snowflake’s focus on innovation to introduce new products into the market also impressed the firm, with Loop Capital maintaining its Buy rating with a price target of $195 for SNOW.
Interestingly, Snowflake isn’t laying off workers to cut costs. Amid macroeconomic headwinds, most of the big tech giants reduced their workforces substantially this year. Meanwhile, Snowflake anticipates hiring 1,000 new employees in Fiscal 2024.
Looking ahead, the company expects third-quarter product revenue growth of around 28% to 29% in the range of $670 million to $675 million. Snowflake hopes to achieve a strong close to Fiscal 2024 (ending Jan 31, 2024), with product revenue growth of 34% year-over-year to $2.6 billion.
Meanwhile, analysts predict total revenue of $714.0 million and earnings of $0.16 per share in the third quarter. Total revenue for Fiscal 2024 is forecast to jump 33.3% to $2.75 billion, further increasing to $3.6 billion in Fiscal 2025.
Compared to a loss of $2.50 per share in Fiscal 2023, analysts also expect Snowflake to report a profit of $0.70 per share in Fiscal 2024. Earnings could further rise to $1.05 per share in Fiscal 2025.
So, the stock trades at 136 times forward earnings, based on Fiscal 2024 earnings growth estimates. With this steep valuation, the risk is certainly high, but investors may be overlooking Snowflake’s growth prospects in data analytics, cybersecurity, and AI, all of which are rapidly evolving markets.
Is SNOW Stock a Buy, According to Analysts?
Turning to Wall Street, TipRanks rates Snowflake stock as a Strong Buy now. Out of the 24 analysts covering the stock in the past three months, 19 rate it a Buy, and five say it’s a Hold. The average SNOW stock price target of $192.60 implies 33.6% upside potential. The target price ranges from a high of $215 to a low of $160.
The Bottom Line on Snowflake
For now, I believe Snowflake is an overlooked AI stock that has the potential to capitalize on the growing opportunities in cloud computing and AI. As the importance of data-driven decision-making becomes more evident, Snowflake’s role in simplifying efficient data analytics and storage will be highlighted, boosting its revenue and profits.
Its innovative platform, coupled with strategic partnerships and rapid revenue growth, positions Snowflake as a company to watch as the AI niche progresses. Hence, I share Wall Street’s enthusiasm for Snowflake’s stock.
