Shares of cloud-native data warehouse specialist Snowflake (NYSE: SNOW) are down nearly 32% in 2024 and nearly 43% from their 52-week high in February 2024.
Snowflake beat consensus revenue estimates but missed earnings estimates in the first quarter of fiscal year 2025 (ending April 30, 2024). Snowflake’s net revenue retention rate of 128% in the first quarter was also lower than 131% in the fourth quarter of fiscal year 2024 and the peak of 179% at the end of fiscal year 2022. Moreover, 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 negatively affected investor sentiment towards the company.
Despite these headwinds, there’s still a lot to be said for this cloud-based enterprise software company, known for delivering scalable, secure, and cloud provider-agnostic solutions to large customers to aggregate data from multiple sources (including on-premise infrastructure and multiple cloud providers such as Amazon‘s AWS, AlphabetGoogle Cloud, and Microsoft‘s Azure).
Here are three reasons why investors should consider taking at least a small stake in this stock and holding it for the next decade.
Healthy finances
Snowflake has long been known for its explosive top-line growth numbers, including 120% year-over-year growth in fiscal 2021 and 106% in fiscal 2022. Snowflake’s fiscal 2025 year-over-year product revenue growth forecast of 24% — while up from its previous forecast of 22% — pales in comparison to such historical numbers. However, that should be an expected trend as the company’s revenue stabilizes and its base expands.
Management has forecast a decline in non-GAAP gross margin to 75% from the previous guidance of 76%. Adjusted operating margin projections also declined to 3% from 6% for fiscal 2025.
This change is largely due to the company’s increasing investments in GPUs for AI initiatives like Cortex, Document AI, and Snowpark. While this may prove to be a headwind in the short term, these AI capabilities could unlock new revenue opportunities in the years to come.
Snowflake has also seen an impressive 46% year-over-year growth in remaining performance obligations (RPO, which indicates future potential revenue growth) to $5 billion at the end of the first quarter. So it’s clear that the company has significant business commitments in the months ahead. Management has also seen renewed client interest in larger deals, as evidenced by the $100 million deal signed in the first quarter and a much larger $250 million deal signed last quarter.
The story continues
Additionally, while Snowflake is not yet profitable under generally accepted accounting principles (GAAP), it reported a healthy non-GAAP free cash flow margin of 44% in the first quarter — highlighting the company’s ability 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 critical to training and running AI models, Snowflake is well-positioned to help customers capitalize on the ongoing AI revolution. The company launched the Cortex AI platform last year to help customers build AI applications using large language models and native 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 Q1, Cortex AI has been adopted by over 750 customers. The company has also developed its large language model, Arctic, which has proven superior to many leading open models across multiple benchmarks at a fraction of the cost. Snowflake plans to use these AI technologies to bridge structured and unstructured data in its enterprise data management and collaboration platform.
Expansion of the total available market
Snowflake is rapidly expanding its total addressable market by expanding its capabilities. The company will make support for the open-source Apache Iceberg data store (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 compared to Snowflake. The support allows Snowflake to handle a much larger data footprint than before. Some customers can move data from the Snowflake platform to the Iceberg format to run their applications, which impacts the company’s revenue. However, most customers prefer to run Snowflake applications directly on 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 enables transactional workloads to run on Snowflake data.
Valuation
Snowflake trades at a price-to-sales (P/S) ratio of 14.8 times, significantly lower than the 20.4 times ratio over the past 12 months.
While it’s impossible to make accurate long-term forecasts for Snowflake, we can make a reasonable guess based on analyst consensus estimates. Analysts expect Snowflake’s revenue to grow by more than 6.5x, from $2.8 billion in fiscal 2024 (ending April 30, 2024) to $18.4 billion in fiscal 2034 (ending April 30, 2034). Assuming the P/S multiple remains at its current low level of 14.8 (it’s near the low end of what it’s been since the company went public in 2020), we can expect the company’s market cap to be around $272 billion by the end of fiscal 2034.
Compared to Snowflake’s current market cap of $45.2 billion, its market cap could be just over six times higher by 2034. If no major stock buybacks or stock splits occur after that, the company’s stock price could increase nearly sixfold in the same time frame, according to reasonable estimates.
Given its significant benefits, Snowflake now seems like a sensible choice for the long term.
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