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Is Snowflake Stock A Buy Now?
Snowflake (NYSE: SNOW) stock has recorded stellar gains of 62% in the past three months, as of this writing, driven by the company's solid fiscal 2025 third-quarter results, which were released in November 2024.
The data cloud platform provider not only beat analysts' expectations on revenue and earnings, but the growing traction of its artificial intelligence (AI)-focused applications allowed it to deliver better-than-expected guidance. However, the recent surge in Snowflake stock means that it is now trading at a relatively expensive valuation.
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Does this mean it is too late for investors to buy it? Let's find out.
Snowflake's valuation may deter investors from buying the stock
Snowflake is currently trading at 17 times sales. That's more than double the U.S. technology sector's average price-to-sales ratio. The forward earnings multiple of 197 also tells us that investors will have to pay a massive premium to buy this cloud stock. That doesn't seem like a good idea, considering that its earnings in fiscal 2025 (which will end on Jan. 31) are set to dip on a year-over-year basis.
Snowflake has been investing in its AI infrastructure, buying graphics processing units (GPUs) from the likes of Nvidia so that its customers can build and deploy AI applications using their data within the security of its data cloud platform. This explains why its margins have been under pressure.
SNOW Profit Margin data by YCharts
Consensus estimates are projecting a 29% decline in Snowflake's earnings in fiscal 2025. But then, a remarkable turnaround is expected in the upcoming fiscal year, as Snowflake's bottom line is projected to jump by an impressive 42%. If Snowflake can sustain such levels of earnings growth over the long run, it may be able to justify the expensive valuation it is trading at.
The good part is that the cloud stock may indeed have enough fuel in the tank to keep delivering robust earnings growth for a long time to come.
AI is turning out to be an outstanding catalyst for the company
Snowflake's investment in building its AI infrastructure should position the company for healthy growth going forward. Customers store their data on Snowflake's unified data cloud platform. The company's AI-focused solutions enable customers to then analyze their proprietary data and build applications with the help of popular large language models (LLMs).
The best part is that Snowflake's customers won't have to invest in any AI infrastructure, as the company has been doing the heavy lifting on that front by purchasing GPUs. They can simply use their data stored on Snowflake's unified data cloud platform to perform a variety of functions. These include interacting with data with the help of natural language processing to gain insights, quickly finding relevant information using prompts, customizing models to suit their needs, and allowing multiple users without coding expertise to use AI models.
The niche Snowflake is targeting by providing AI infrastructure is set to become massive in the long run. That explains why the company is expecting its total addressable market to double by 2028 to $342 billion.
The more important thing to note here is that AI is already having a positive impact on Snowflake's performance. This is evident from a 55% year-over-year increase in the company's remaining performance obligations (RPO) in the third quarter of fiscal 2025. RPO is the total value of a company's future contracts that are yet to be fulfilled. The fact that this metric increased at a significantly faster pace than the 29% growth in Snowflake's product revenue is a clear indication that it is landing more contracts than it is fulfilling right now.
As Snowflake fulfills those contracts going forward, its revenue growth rate should ideally pick up in the future. What's worth noting is that Snowflake's RPO stands at $5.7 billion, substantially higher than the $3.6 billion revenue that the company is expected to deliver in fiscal 2025. It won't be surprising to see Snowflake's RPO head higher in the future, as about 30% of its total customer base is currently using its AI solutions.
So, a big chunk of Snowflake's customers are yet to start using its AI offerings. Moreover, the growing adoption of AI means that it can keep attracting new customers. All this indicates that Snowflake seems built for outstanding growth in the long run.
That's why growth-oriented investors can consider buying this tech stock despite its expensive multiples. After all, it may be able to justify its valuation in the future by logging terrific earnings growth on the back of stronger margins arising out of the cross-sale of its AI offerings to a large pool of customers.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Snowflake. The Motley Fool has a disclosure policy.
