Snowflake (SNOW), established in 2012, is a major player in data management and analytics. Amid the artificial intelligence (AI) rush, Snowflake's growth has been explosive, driven by rising demand for data analytics and the shift to cloud computing.
The company is still unprofitable, and its stock is overvalued, so investors are hesitant to invest in SNOW. Nonetheless, Wall Street believes in the company's long-term prospects, and expects its stock to skyrocket this year.
Despite its promising prospects, Snowflake's stock market journey has been marked with volatility. SNOW stock is down 24.5% year-to-date, compared to the Nasdaq Composite’s ($NASX) gain of 7.4%.
The stock is also trading 36% below its 52-week high, suggesting that now could be a good time to buy the dip.
Snowflake Stock: A Snowstorm of Potential
In February, Snowflake announced some senior leadership changes, which contributed to the stock's decline. Frank Slootman retired as the company's CEO, and Sridhar Ramaswamy took over. While abrupt C-suite leadership changes raise investor concerns, they may also have a positive impact on the organization. A new CEO could bring about new changes that will propel the company into the next phase of growth, particularly amidst the AI revolution.
Snowflake's revenue is growing significantly, driven by product revenue from platform consumption in a single, integrated offering, as well as revenue from professional services and other segments.
In the recently reported fourth quarter of fiscal 2024, product revenue came in at $738.1 million, out of total revenue of $774.7 million. Product revenue jumped 33% year-over-year, while total revenue increased 32% over Q4 of fiscal 2023.
The company also had 461 customers with more than $1 million in trailing 12-month product revenue. Its net revenue retention rate, which measures a company's ability to retain customers, stood at 131%, which is indicative of a healthy business.
Furthermore, the company's remaining performance obligations (RPO) increased by 41% to $5.2 billion during the quarter. RPO estimates the amount of revenue that the company can generate in the future. What's impressive is that Snowflake predicts 50% of the RPO will be realized within the next 12 months.
Despite all of these green flags, the company remains unprofitable. However, Snowflake reduced its losses to $0.51 per share, down from $0.64 per share in the prior-year quarter. On the balance sheet, the company had $3.84 billion in cash balances (cash, cash equivalents, and short-term investments). Furthermore, by the end of fiscal 2024, SNOW had $810.2 million in adjusted free cash flow.
Looking ahead to the first quarter of fiscal 2025, management expects modest product revenue growth of 26% to 27%, with a 22% increase for the full fiscal year to $3.2 billion.
Despite the dramatic revenue growth, the bottom line remains in the red. As AI advances, global cloud infrastructure services spending is expected to increase by 20% in 2024, according to Canalys. This could provide a tailwind for Snowflake. If the revenue growth momentum continues at this rate, the company may soon become profitable.
Analysts predict revenue growth of 22.3% and 23.6% in fiscal years 2025 and 2026, respectively. Furthermore, analysts expect the company to report a net profit of $0.95 per share by fiscal 2025. Profits could increase to $1.29 in fiscal 2026.
As Snowflake is still unprofitable, we will look at its price-to-sales ratio for valuation purposes. The stock's forward price-to-sales ratio of 15.4x is lower than the average of 72x over the previous four years.
Is SNOW Stock a Buy, According to Wall Street?
Recently, Goldman Sachs analyst Kash Rangan reiterated his bullish view on SNOW stock following the company's announcement of new CEO Sridhar Ramaswamy.
The analyst believes that the market has undervalued the new CEO's "technical expertise and proven track record with large-scale product management, which could lead to a re-acceleration of growth." Rangan anticipates the company's growth will potentially exceed expectations in the near future.
KeyBanc also initiated coverage of SNOW stock, rating it a "buy" and setting a target price of $185.
Overall, on Wall Street, SNOW stock is a “moderate buy.” Out of the 41 analysts in coverage, 25 rate it a “strong buy,” three rate it a “moderate buy,” 11 recommend a “hold,” and two analysts suggest a “strong sell.”
SNOW's mean target price of $205.00 suggests an upside potential of 36.3% over the next 12 months. The Street-high estimate stands at $246, which implies a price jump of 63% above current levels.
The Bottom Line on SNOW Stock
The competition in the cloud data market is fierce. Snowflake's ability to stay ahead of the curve, innovate quickly, and provide value to its customers will be critical to maintaining its momentum. Although the stock appears to be expensive right now, an increase in public cloud spending over time could be extremely beneficial to Snowflake in the long run.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
