Snowflake ( -3.00%) was one of many hottest development shares in 2020 and 2021. The cloud-based warehousing firm went public at $120 per share in September 2020, and its inventory greater than doubled to $245 on its very first commerce.
Snowflake’s inventory finally hit an all-time excessive of $401.89 in November 2021. That gave it a market cap of $122.9 billion, a whopping 102 occasions the $1.2 billion in revenues it could generate in fiscal 2022 (which resulted in January 2022).
However as of this writing, Snowflake’s inventory trades round $145 per share with a market cap of $46.6 billion. It nonetheless is not low cost at 23 occasions this yr’s estimated gross sales of $2.1 billion, however that may be an inexpensive valuation relative to its development charges. Between fiscal 2019 and monetary 2022, Snowflake’s annual income grew at a jaw-dropping compound annual development price (CAGR) of 133%. However can it preserve that momentum over the long run and turn out to be a trillion-dollar inventory by 2030?
Why is Snowflake rising so quickly?
Giant organizations typically retailer their knowledge throughout a variety of computing platforms and software program purposes, however these fragmented silos could make it robust to make data-driven selections. Snowflake breaks down these silos, aggregates all of that fragmented knowledge, and shops it in a centralized cloud-based knowledge warehouse the place it may be simply accessed by third-party purposes and knowledge visualization companies like Salesforce‘s Tableau.
Snowflake is not the one cloud-based knowledge warehouse on the town. Amazon ( -1.23%) and Microsoft ( -0.22%) combine comparable companies (Redshift and Azure Synapse, respectively) into their cloud infrastructure platforms.
Nonetheless, Snowflake stands aside from these opponents as a result of it really works with a variety of cloud computing platforms as a substitute of locking its shoppers right into a single ecosystem. It additionally splits its storage and computing platforms into stand-alone usage-based companies, so corporations solely pay for the computing energy they want as a substitute of paying recurring subscriptions.
That flexibility made Snowflake a preferred selection for corporations that did not need to tether themselves to Amazon, Microsoft, or different public cloud giants. Snowflake solely served 1,547 prospects on the finish of July 2019. That determine had risen almost 5 occasions to 7,292 on the finish of the third quarter of fiscal 2023 final October.
Can Snowflake preserve that momentum?
Snowflake will not hold producing triple-digit development by the tip of the last decade, but it surely may nonetheless develop a lot sooner than many software program corporations. Final June, Snowflake predicted its product revenues (which account for many of its prime line) would soar from $1.14 billion in fiscal 2022 to about $10 billion in fiscal 2029, which might equal a CAGR of 36%.
It expects that development to be pushed by the next mixture of bigger prospects, which generate over $1 million in trailing-12-month product income. It expects round 1,400 of its prospects to belong to that high-value cohort in fiscal 2029, in comparison with solely 287 prospects within the third quarter of fiscal 2023.
That is a daring forecast, however Snowflake’s excessive web income retention price, which gauges its year-over-year income development per current buyer, helps that bullish thesis. That key development metric nonetheless got here in at 165% within the third quarter, in comparison with 171% within the second quarter and 173% within the year-ago quarter.
It is extremely uncommon for a tech firm that generates greater than $1 billion in annual income to report such a excessive retention price. For instance, Datadog ( -2.12%) — one other that’s anticipated to generate $1.7 billion in revenues this yr — merely goals to maintain its retention charges above 130%.
So may Snowflake turn out to be a trillion-dollar firm?
If Snowflake generates $10 billion in revenues in fiscal 2029, then grows its income by 30% to $13 billion in fiscal 2030, it may simply generate some multibagger features. Nonetheless, its valuations will doubtless forestall it from becoming a member of the 12-zero membership.
If Snowflake generates $13 billion in revenues in 2030 and nonetheless trades at 20 occasions gross sales, it could be value $260 billion — a near-six-bagger acquire from its present market cap. But when itscools to 10, which arguably appears extra reasonable for an organization that generates 20% to 30% gross sales development, it could solely be value about $130 billion.
That may be triple its present valuation, but it surely may disappoint traders who anticipate Snowflake to turn out to be a trillion-dollar firm which is akin to the highestin just some years. That is as a result of quite a lot of development has already been baked into Snowflake’s inventory at its present costs — and it must hold dazzling traders to take care of its premium valuation.
John Mackey, former CEO of Complete Meals Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of administrators.has positions in Amazon.com and Salesforce. The Motley Idiot has positions in and recommends Amazon.com, Datadog, Microsoft, Salesforce, and Snowflake. The Motley Idiot has a .