Shares of this cloud-native enterprise data storage and management platform are likely to soar even higher in the long term.
Stocks of companies specializing in cloud-native data warehouses Snowflake (snow 0.01%) It is expected to fall about 32% in 2024 and almost 43% from its February 2024 52-week high.
Snowflake beat consensus estimates for revenue in the first quarter of fiscal year 2025 (ending April 30, 2024), but earnings fell short of expectations. Snowflake's first-quarter net revenue retention rate of 128% was lower than the 131% in the fourth quarter of fiscal year 2024 and the peak of 179% at the end of fiscal year 2022. Additionally, Snowflake investors remain skeptical about the sudden resignation of CEO Frank Slootman and his replacement by Sridhar Ramaswamy. A major data breach in April 2024 further negatively impacted investor sentiment toward the company.
Despite these headwinds, there's a lot to like about this cloud-based enterprise software company. It offers large clients access to a wide range of services from multiple sources, including on-premise infrastructure and cloud-based services. AmazonAWS, alphabetGoogle Cloud, and Microsofton Azure).
Here are three reasons why investors should consider buying at least a small amount of this stock and holding it for the next decade.
Financially Sound
Snowflake has long been known for its explosive revenue growth, including 120% year-over-year growth in fiscal 2021 and 106% year-over-year growth in fiscal 2022. Snowflake's fiscal 2025 product revenue year-over-year growth guidance of 24% is above its previous guidance of 22%, but pales in comparison to these historical numbers. However, this should become an expected trend as the company's revenue stabilizes and its base expands.
Management now expects non-GAAP gross margins to decline to 75% from the previous outlook of 76%. Adjusted operating margin forecast was also lowered to 3% from 6% for fiscal year 2025.
This change is primarily related to the company's increased investment in GPUs for AI initiatives such as Cortex, Document AI, and Snowpark. While this may pose a short-term headwind, these AI capabilities are likely to create new revenue opportunities in the coming years.
Snowflake has also seen impressive growth in remaining performance obligations (RPOs, backlog that indicates future revenue growth potential) to $5 billion at the end of the first quarter, up 46% year over year, so the company clearly has significant business commitments in the coming months. Management has also noted increased customer interest in larger deals, as evidenced by a $100 million deal closed in the first quarter and an even larger $250 million deal closed last quarter.
Additionally, while Snowflake is not yet profitable on a generally accepted accounting principles (GAAP) basis, it posted a healthy first-quarter non-GAAP free cash flow margin of 44%, highlighting the company's ability to generate strong cash flow from its operations. The company also ended the first quarter with $4.5 billion in cash and investments, giving it significant financial flexibility to invest in growth initiatives.
Strong AI Initiative
With the vast amount of data essential to train and run AI models, Snowflake is well poised to help customers benefit from the ongoing AI revolution. The company launched its Cortex AI platform last year to help customers build AI applications using large language models and their own data without the need for extensive coding. Cortex AI helps improve productivity by reducing time-consuming tasks across multiple use cases, including sentiment analysis, data extraction or summarization, image analysis, automated customer support, universal search, or allowing employees to search data using natural language.
Cortex AI has already been adopted by more than 750 customers since it became generally available in Q1. The company has also developed a large-scale language model called Arctic that has proven to outperform many leading open models in multiple benchmarks at a fraction of the cost. Snowflake aims to leverage these AI technologies to bridge structured and unstructured data in its enterprise data management and collaboration platform.
Expanding the overall target market
Snowflake is rapidly expanding its overall addressable market with improved capabilities: The company plans to make support for open-source Apache Iceberg data storage, a structured, interoperable format, generally available in the second half of fiscal year 2025.
Many customers have 100 to 200 times more data in their data lakes and cloud storage than Snowflake. This support will enable Snowflake to handle a much larger data footprint than it has in the past. Some customers will migrate their data from the Snowflake platform to Iceberg format to run their applications, potentially impacting the company's bottom line. However, most customers will likely prefer to run Snowflake applications directly on Iceberg data. This will enable the company to propose and capture new use cases in areas such as data engineering and AI.
Additionally, with the upcoming general availability of hybrid tables, you will be able to run transactional workloads on your Snowflake data.
evaluation
Snowflake's price-to-sales multiple (P/S) is 14.8x, well below its trailing-12-month P/S multiple of 20.4x.
While an exact long-term forecast for Snowflake is not possible, we can make a reasonable guess based on analyst consensus forecasts. Analysts expect Snowflake's revenues to grow by more than 6.5x from $2.8 billion in fiscal year 2024 (ending April 30, 2024) to $18.4 billion in fiscal year 2034 (ending April 30, 2034). Assuming the P/S multiple remains at its current low level of 14.8 (the low end since the company went public in 2020), the company's market cap is expected to be around $272 billion by the end of fiscal year 2034.
So, compared to Snowflake's current market cap of $45.2 billion, its market cap could be just over six times that amount by 2034. After that, unless there is a major share buyback or stock split, a reasonable estimate is that the company's stock price could grow almost six times over the same period.
So, given its key advantages, Snowflake seems to be a wise long-term choice at this point.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet, Amazon, Microsoft, and Snowflake. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
