Despite its considerable potential for gains, Snowflake (NYSE: SNOW) has become a somewhat volatile stock. It is down more than 55% from its all-time high and, following an unexpected CEO change, fell 18% after its latest earnings report.
Nonetheless, investors should not ignore the considerable attributes of this artificial intelligence (AI) stock. As the company likely turns to a more AI-oriented direction, investors should treat this as an opportunity to buy and hold Snowflake.
Snowflake AI
Snowflake offers the leading data cloud product, which allows entities to store, manage, and secure their data from a centralized location. This sidesteps the security and data-integrity issues of storing multiple copies of data sets on servers.
AI plays a crucial role in maintaining this lead. The company’s AI helps to identify the right data points and assets to deliver insights that clients will find valuable.
Snowflake has bolstered its AI capabilities in large measure through acquisitions. Examples of these purchases are Streamlit, which can help clients build apps powered by large language models, and Applica, whose software sorts data through deep learning.
And the purchase of Neeva gave Snowflake software that enhances search capabilities by leveraging generative AI.
The former CEO of Neeva, who was previously Snowflake’s senior vice president for AI, has now assumed the helm at Snowflake. While the departure of the previous CEO, Frank Slootman, brings some uncertainty, bringing in an AI guru as CEO could make Snowflake a leader in AI, a factor that could bode well for its stock in the long term.
Why Snowflake?
Nonetheless, investors seem to have a negative take on that move, at least for now. Along with the sudden CEO change, investors expressed dissatisfaction with its forecast for 22% revenue growth in fiscal 2025.
However, the company’s value proposition makes it appear expensive for a reason. Snowflake is a neutral platform in this industry, meaning it functions seamlessly regardless of the cloud infrastructure provider. Thus, even though Amazon (which partners with Snowflake) and other cloud infrastructure providers offer competing data cloud products, these peers will often promote Snowflake to clients above their own data cloud products.
Furthermore, customers pay for Snowflake based on usage, meaning if a client adds users or data stored on the platform, Snowflake’s revenue rises. This is why its net revenue retention was 131% in the fourth quarter of last year, meaning long-term clients spent 31% more on the platform compared with the previous year.
Snowflake by the numbers
In terms of overall revenue, its $2.8 billion for fiscal 2024 (ended Jan. 31) rose 36% versus fiscal 2023.
Unfortunately for Snowflake, its almost $1.2 billion in stock-based compensation contributed to its $3 billion in operating expenses during that time. Consequently, it lost $836 million during fiscal 2024 on the basis of generally accepted accounting principles (GAAP), slightly more than the $797 million loss in the previous year.
Still, adjusted free cash flow during the fiscal year improved to $810 million versus $520 million in the previous year, which should limit the impact of the GAAP losses.
Also, despite investor reactions to news of the CEO change, Snowflake’s stock performance has remained ahead of the S&P 500 over the last year, and even after that recent drop, the price-to-sales (P/S) ratio of 24 does not make the stock cheap. Hence, as revenue continues to grow, share prices should increase over time.
Consider Snowflake stock
Despite the elevated valuation, investors should consider treating the latest drop in the stock price as a buying opportunity. While Snowflake is not inexpensive, investors might like that the company bills by usage. This bolsters revenue levels as more users turn to its data cloud product.
Moreover, even though the change in leadership brings uncertainty, the new CEO brings a wealth of AI experience that should help Snowflake maintain or possibly expand its technical edge. That lead should bring higher levels of adoption, a factor that bodes well for Snowflake’s financials and, by extension, its stock price.
Should you invest $1,000 in Snowflake right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has positions in Snowflake. The Motley Fool has positions in and recommends Amazon and Snowflake. The Motley Fool has a disclosure policy.
1 No-Brainer AI Stock Down 56% to Buy and Hold Forever was originally published by The Motley Fool
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