SNOW
This has been a rough year for Snowflake (NYSE: SNOW) shareholders. Despite beginning 2024 on an optimistic note, the data cloud provider's stock has now plummeted 48% from its mid-February peak, driven by hurdles like management changes, intensifying competition, and underwhelming quarterly earnings. Nonetheless, this sharp decline might present a golden opportunity for perceptive investors, especially considering Snowflake's current valuation.
In May, Snowflake announced its fiscal Q1 results for 2025 (ending April 30), revealing a substantial 34% year-over-year increase in product revenue, reaching $790 million. This figure exceeded its guided range of $745 million to $750 million. Furthermore, the company revised its full-year product revenue forecast to $3.30 billion from the earlier projection of $3.25 billion—a promising 24% growth over fiscal 2024.
Given the notable growth in Snowflake's remaining performance obligation (RPO) last quarter, there's a strong possibility that the company may further enhance its revenue outlook. RPO represents contracted future revenue that hasn't yet been recognized, including deferred and non-cancellable contracts for future invoicing and revenue recognition. The impressive expansion in RPO, which outpaced top-line growth, suggests that revenue acceleration could be on the horizon.
The burgeoning artificial intelligence (AI) market further bolsters Snowflake's growth prospects. During its 2024 Investor Day, management projected that the company’s total addressable market could skyrocket from $152 billion in 2023 to a whopping $342 billion by 2028. On the other hand, Snowflake Copilot is engineered to assist users in writing structured query language (SQL) code, enhancing productivity. Document AI, a proprietary LLM, will help customers extract data from various document formats. As these products roll out, Snowflake could boost spending from existing clients and attract new ones.
Interestingly, Snowflake concluded fiscal Q1 with 9,822 customers, marking a 21% year-over-year increase. Notably, the clients contributing over $1 million in annual product revenue surged 30% to 485. This trend of increased customer spending could persist thanks to Snowflake's new AI-driven growth drivers and forthcoming product launches.
Critics may point out that Snowflake's growth is impacting its margins. The previous quarter saw a slight dip in the company's non-GAAP product gross margin to 76.9%. Additionally, full-year margin guidance was reduced to 75% from 76%. Analysts anticipate that Snowflake's adjusted earnings will drop to $0.62 per share in fiscal 2025, down from $0.98 last year. However, they project a rebound to $0.99 per share next fiscal year. Management cited increased GPU-related costs tied to AI initiatives as the reason for the hit in profitability. Nevertheless, these investments are expected to unlock significant long-term growth, enabling Snowflake to generate more revenue from existing customers through its AI offerings. Thus, temporary setbacks could pave the way for a stronger long-term performance.
At a price-to-sales ratio of 14, Snowflake's stock appears attractive, especially compared to its multiple of 25 at the end of 2023. While still above the U.S. tech sector's average of 8, Snowflake is cheaper by this metric than ever before. Given the company's robust revenue pipeline and superior revenue growth, astute investors might find this an opportune moment to buy. Notably, 71% of the 48 analysts covering Snowflake rate it as a buy, with a median 12-month price target of $200—representing a 60% upside from current levels. Should Snowflake's revenue growth continue to exceed expectations, the stock could soar again.
