This has been a terrible year for Snowflake (NYSE: SNOW) shareholders. Although the data cloud provider started 2024 on a positive note, the stock is now down 48% from the 52-week high it hit in mid-February, thanks to issues ranging from management turnover to increasing competition and quarterly results that fell short of expectations. .
However, that sharp pullback may have created an opportunity for savvy investors, especially given the valuation at which Snowflake is currently trading.
Snowflake’s growth is likely to accelerate
When Snowflake announced results for the first quarter of fiscal 2025 (ending April 30) in May, it reported that product revenue was up 34% year over year to $790 million. That was significantly higher than the guidance range of $745 million to $750 million. Additionally, the company raised full-year product revenue expectations from $3.25 billion to $3.30 billion.
The revised figure points to a 24% increase in revenue over fiscal 2024. However, there is a good chance that Snowflake will further increase its revenue expectations as the year progresses, given the impressive growth in residual performance obligation (RPO) last quarter. RPO refers to the “amount of contracted future revenue that has not yet been recognized.”
This measure includes Snowflake’s deferred revenue – funds the company has received in advance for services to be provided later – and non-cancelable contracts that “will be billed and recognized as revenue in future periods.” The fact that this metric grew much faster than Snowflake’s revenue suggests that the company’s revenue growth is likely to accelerate.
More importantly, Snowflake predicts an incredible expansion of its total addressable market thanks to the rise of artificial intelligence (AI). In its 2024 Investor Day presentation, Snowflake management claimed that the total addressable market could rise from $152 billion in 2023 to $342 billion in 2028. And the company has lined up a range of products to take advantage of the AI-driven opportunities within the data cloud. market.
Many of these products will be made generally available to customers in the current fiscal year. These include Cortex AI, Document AI and Snowflake Copilot. For example, Cortex AI will enable Snowflake customers to build generative AI applications such as chatbots using large language models (LLMs), using their own data.
Meanwhile, Snowflake Copilot is designed to help the company’s customers write Structured Query Language (SQL) code and help improve productivity. And Document AI is a proprietary LLM that customers can use to extract data from different types of documents. As Snowflake rolls out these products at scale, it can potentially increase spending from its existing customers while attracting new customers.
It’s worth noting that Snowflake ended its first fiscal year with 9,822 customers, up 21% from the prior year period. However, the number of customers contributing more than $1 million in product revenue annually to Snowflake has increased 30% year over year to 485. The company may be able to maintain this trend of increased customer spending thanks to new growth drivers like AI. , as well as the focus on launching new products.
However, Snowflake’s detractors might argue that growth comes at the expense of margins. After all, the company’s gross margin on non-GAAP products fell slightly to 76.9% in the previous quarter. The company also lowered its full-year margin guidance to 75% from the previous estimate of 76%.
Not surprisingly, analysts predict Snowflake’s adjusted earnings will fall to $0.62 per share in fiscal 2025, compared to $0.98 per share last year. While that’s a big drop, they should rise to $0.99 per share next fiscal year. Management attributed the hit to profitability to “higher GPU-related costs associated with our AI initiatives.”
But at the same time, these investments will unlock a robust long-term growth opportunity for Snowflake and ideally allow the company to generate more revenue from its existing customers as they buy into its AI-related offerings. Any short-term pain can ultimately pave the way for stronger long-term results. Therefore, investors need to focus on the big picture here.
The valuation makes the stock an attractive bet at the moment
Investors can buy Snowflake shares at a relatively attractive price-to-sales ratio of 14, which is well below the multiple of 25 at the end of 2023. Naturally, Snowflake’s sales multiple remains higher than the US tech sector average of 8. , Snowflake is now cheaper than ever before by that metric.
Given Snowflake’s solid revenue pipeline and better-than-expected revenue growth, smart investors might consider buying the stock right now. After all, 71% of the 48 analysts covering Snowflake consider it a Buy, and their average 12-month price target for the stock is $200 – 60% above the current price.
If Snowflake’s revenue growth continues to exceed expectations, the stock could rise again.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Snowflake. The Motley Fool has a disclosure policy.
1 Beautiful Artificial Intelligence (AI) Growth Stocks Dropped 48% to Buy Hand Over Fist Before It Started Rising Originally published by The Motley Fool
