HomeMost PopularThe Data-Driven Age of Generative AI: Snowflake's Position in the Market

The Data-Driven Age of Generative AI: Snowflake’s Position in the Market

Actionable Trade Ideas

always free

Snowflake (NYSE: SNOW) stands out as one of the most expensive buy-rated stocks in the technology sector. Since going public, Snowflake has maintained a high valuation, aided by the increasing interest in generative AI. Despite the challenges posed by the macro environment, Snowflake has shown resilient growth rates and boasts a net cash balance sheet with positive free cash flow, enhancing its financial stability. While the stock may not be cheap, it remains a promising investment opportunity for those looking to capitalize on the growth of data.

Snowflake Stock Price

In 2022, Snowflake, like other tech stocks, experienced a crash but has since recovered. Throughout this period, the stock consistently maintained its premium valuation. The rise of generative AI has further highlighted the importance of data, solidifying the ongoing rally in Snowflake’s stock.

Data by YCharts

In terms of key metrics, Snowflake delivered a 36% YoY revenue growth to $674 million in its most recent quarter. While this marked a sequential step-down from the 48% YoY growth in the previous quarter, Snowflake’s cloud optimization remains a significant factor influencing its performance.

Revenue

The company continues to grow its customer count, which is quite impressive considering the current hesitation in IT spending. Additionally, Snowflake has seen a decline in its net revenue retention rate, from a peak of 178% to 142%. However, the company has compensated for slower top-line growth by expanding its non-GAAP operating margin to 8%, leveraging its operations effectively.

Customer Growth

With a bulletproof balance sheet of $4.9 billion in cash and zero debt, Snowflake is well-positioned to weather any market uncertainties. Management has reiterated expectations for $2.6 billion in product revenue this year. Given the company’s performance in the first half of the year, surpassing this guidance seems plausible.

Guidance

Amidst the challenging macro environment, Snowflake’s management has remained optimistic about the company’s future prospects. The rise of generative AI reinforces the value of data organization, potentially accelerating the end of cloud optimization headwinds. Snowflake’s data warehouse and data lake solutions make it a key player in the era of generative AI, as data continue to grow in importance.

Is Snowflake Stock A Buy, Sell, or Hold?

Considering Snowflake’s current position and the growing demand for data-driven solutions, the stock seems promising. In the long term, management has set ambitious goals of reaching $10 billion in product revenue and 25% non-GAAP operating margins by FY29. However, valuation remains a concern, as Snowflake trades at around 18x sales. Continued growth and sustained elevated growth rates will be crucial for justifying this valuation.

Consensus Estimates

While Snowflake may not be attractively priced on an earnings basis for several years, its potential upside cannot be ignored. Close competitor Databricks recently raised funds at a $43 billion valuation, underscoring the market’s confidence in data-driven solutions. Applying a price-to-sales valuation in FY29 suggests potential annual upside of around 17% over the next 5.5 years.

Long Term Guidance

It is important to consider the risks associated with investing in Snowflake. Valuation remains a top concern, and any stumble in the company’s growth trajectory could lead to a significant compression in its valuation. Increased competition, particularly from companies like Databricks, could also impact Snowflake’s growth rates. Moreover, the involvement of Berkshire Hathaway as a stakeholder may have contributed to Snowflake’s premium valuation. If Berkshire Hathaway were to sell its stake, the valuation could potentially compress. It is crucial to be aware of the market sentiment towards Snowflake and to explore alternative buying opportunities within the tech sector.

Despite its rich valuation, Snowflake remains a buy-rated stock due to its solid position in the data-driven era and the long-term growth potential of the company. The growth of data is a compelling investment thesis, but investors should carefully evaluate the risks associated with Snowflake’s valuation.

Swing Trading Ideas and Market Commentary

Need some new swing ideas? Get free weekly swing ideas and market commentary from Jonathan Bernstein here: Swing Trading.

Explore More

Weekly In-Depth Market Analysis and Actionable Trade Ideas

Get institutional-level analysis and trade ideas to take your trading to the next level, sign up for free and become apart of the community.