The rally surrounding big-tech stocks has powered the broader indices toward all-time highs. Meanwhile, several other tech stocks continue to trade significantly below record prices. One such high-growth tech stock is Snowflake (NYSE:SNOW), which is down about 64% from record highs. Despite its lofty multiple, I am bullish on Snowflake stock due to its strong revenue growth, high customer retention rates, and robust cash-flow margins.
An Overview of Snowflake
Valued at $51.4 billion, Snowflake aims to enable enterprises to mobilize their data with its Data Cloud platform. Snowflake explains that customers can use the Data Cloud to unite siloed data, power data applications, discover and share data, as well as execute diverse AI/ML (artificial intelligence/machine learning) and analytic workloads.
Basically, Snowflake offers an enterprise-facing data analytics platform across multiple clouds and geographies. Snowflake went public in 2020 and touched a record high in November 2021 on the back of stellar revenue growth. For context, the company increased its sales from $265 million in Fiscal 2020 (ended in January) to $592 million in Fiscal 2021, $1.2 billion in 2022, and $2.06 billion in 2023.
How Did Snowflake Perform In Fiscal Q4 of 2024?
Snowflake stock plunged over 20% in a single trading session following the announcement of its Q4 results. The company disclosed the departure of CEO Frank Slootman, who had led Snowflake since 2019 and took it public a year later.
Investors were also worried about Snowflake’s decelerating revenue growth rates. Its sales rose by 32% year-over-year to $774.7 million, while operating losses widened to $275.5 million from $239.8 million in the year-ago period. Snowflake forecast product revenue between $745 million and $750 million in Q1, lower than estimates of $759 million. It also projected an adjusted operating margin of 3% in Q1, lower than estimates of 7.2%.
In Q4, younger customers drove Snowflake’s top line, as these accounts added new workloads in migrating from legacy vendors. Moreover, verticals such as financial services and retail were its largest revenue contributors, while customers from the EMEA (Europe, Middle East, and Asia) region increased spending significantly.
Solid Financials, Customer Growth, and Retention Rates
Snowflake emphasized that customer optimization normalized in Q4, with eight of its top 10 accounts growing sequentially. Historically, optimizations have expanded the company’s long-term opportunities. Snowflake ended Fiscal 2024 with 461 customers who spend at least $1 million on its platform annually, an increase of 39% year-over-year. It also has 83 customers who generate product revenue of at least $5 million each year, up from 75 customers in Q3.
Moreover, 691 of Forbes Global 2000 companies are its customers, up 8% from the year-ago period. Snowflake’s total customers have risen to 9,437 in Fiscal Q4 2024 from 7,744 in the same period last year.
Its net revenue retention rate stood at 131%, which suggests that existing customers raised spending by 31% in the last 12 months. A widening customer base and higher spending are key drivers for SaaS (software-as-a-service) companies, including Snowflake.
It ended Q4 with remaining performance obligations (RPOs) of $5.2 billion, representing 41% growth from the year-ago quarter, providing shareholders with enough revenue visibility in the near term. Although RPOs provide insight into secured future revenue rather than forecasting new sales, they signal an improving macro environment, as Snowflake expects 50% of RPOs to be recognized as revenue in the next four quarters.
Snowflake’s strong revenue growth has translated to consistent cash flows for the tech giant. Its operating cash flow rose 59% to $344.6 million in Q4, while adjusted free cash flow stood at $810 million in Fiscal 2024, indicating a margin of over 30%.
Armed with $4.8 billion in cash, Snowflake has enough room to reinvest in growth projects and target highly accretive acquisitions, boosting its future cash flows in the process.
What Is the Target Price for Snowflake Stock?
Out of the 35 analyst ratings given to Snowflake stock, 24 are Buys, nine are Holds, and two are Sells, indicating a Moderate Buy consensus rating. The average Snowflake stock price target is $212.23, indicating upside potential of 35.2% from current levels.
Snowflake is forecast to report adjusted earnings of $0.97 per share in Fiscal 2025 and $1.32 per share in Fiscal 2026. So, priced at 168x forward earnings, Snowflake stock is very expensive, given that the sector median forward earnings multiple is much lower at 24.9x.
Alternatively, growth stocks command a premium. Further, tech companies’ asset-light businesses allow them to benefit from high operating leverage and improve profit margins at a faster pace than revenue.
The Takeaway
Snowflake stock is not cheap, but it continues to grow rapidly and should be on the radar of investors with high-risk appetites. With enough dry powder available, Snowflake’s expanding cash flow margins, strong retention rates, and enviable revenue numbers make it a solid investment to consider right now.
