Gaining 40% This Year, Will Revival In Cloud Demand And Generative AI Drive Snowflake Stock Higher?

SNOW: Snowflake logo

Snowflake (NYSE:SNOW) stock has gained about 40% year-to-date, amid increasing optimism of a revival in cloud spending by large businesses, although it has marginally underperformed the Nasdaq-100, which remains up by over 50% over the same period. Over Q3 FY’24 the company posted a better-than-expected set of results with product revenues jumping almost 34% year-over-year to $698.5 million. Snowflake also raised its full-year product revenue guidance, now projecting sales of $2.65 billion, up from a previous estimate of $2.6 billion. The company also boosted its full-year adjusted operating margin to 7%, up from a previous expectation of 5%. Key metrics have also remained strong. Snowflake’s core revenue retention rate stood at a healthy 135%, indicating that the company continues to expand business with its existing customers.

Investors also appear to like the steps Snowflake is taking in the artificial intelligence space. Snowflake’s core products help businesses store, organize, and analyze data across multiple cloud providers such as Amazon Web Services and Azure, and this positions the company well in building generative AI into its tools. For instance, the company launched Snowflake Cortex – a product that helps software developers build and run AI queries – last month. Earlier this year, the company introduced Snowpark Container Services which enables companies to deploy and run generative AI and full-stack apps on its platform. Snowflake also acquired Neeva, a startup that uses generative AI, to bring enhanced search capabilities to its products. Additionally, Nvidia – which is the go-to player for AI chips – said it was partnering with Snowflake to offer generative AI technology, specifically its artificial intelligence software, and chips, to Snowflake’s cloud-based data warehousing customers earlier this year.

Now looking over a longer window, SNOW stock has faced a notable decline of 30% from levels of $280 in early January 2021 to around $200 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the decrease in SNOW stock has been far from consistent. Returns for the stock were 20% in 2021, -58% in 2022, and 39% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 23% in 2023 (YTD) – indicating that SNOW underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could SNOW face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

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Snowflake trades at about 18x projected FY’24 revenue presently, which is below the 50x plus multiples the stock traded at the back at its peak in 2021. Snowflake is likely to be a big beneficiary of the continued pivot from on-premise databases to cloud-based warehousing solutions, with revenue growth projected at over 30% for next year as well, per consensus estimates. That said, Snowflake’s growth is slowing down and the company’s rising share count is also a concern. Weighted average shares outstanding is projected at 361 million shares for the end of fiscal 2024 compared to an average of less than 319 million in fiscal 2023, due to the company’s heavy use of stock-based compensation.  We value Snowflake stock at about $190 per share, which is slightly below the current market price. See our analysis  Snowflake Valuation: Is SNOW Stock Expensive Or Cheap? for more details. See our analysis of Snowflake Revenue for more details on Snowflake’s business model and how its revenues are expected to trend.

Returns Dec 2023
MTD [1]
YTD [1]
Total [2]
 SNOW Return 6% 39% -29%
 S&P 500 Return 3% 23% 111%
 Trefis Reinforced Value Portfolio 6% 36% 600%

[1] Month-to-date and year-to-date as of 12/18/2023
[2] Cumulative total returns since the end of 2016

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