1 Brilliant Artificial Intelligence (AI) Growth Stock Falls 48% to Buy Handover Fist Before It Rises

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The cloud company's shares are down 48 percent from their 52-week high, but the prospects for better times ahead are good.

It's been a terrible year for Snowflake (Snow -0.47%) Shareholders Although the data cloud provider started 2024 on a positive note, the stock is now down 48% from its 52-week high in mid-February thanks to everything from management business to increased competition. Thanks to issues leading up to quarterly results that didn't meet expectations. .

However, this sharp pullback may have created an opportunity for savvy investors, especially considering the price Snowflake is currently trading at.

Avalanche growth is likely to accelerate.

When Snowflake released results for its fiscal 2025 first quarter (ended April 30) in May, it reported that product revenue rose 34 percent year-over-year to $790 million. This was significantly higher than the guidance range of $745 million to $750 million. Additionally, the company raised its full-year product revenue guidance to $3.30 billion from an earlier outlook of $3.25 billion.

The revised figures point to a 24% increase in revenue from FY2024. However, there's a good chance Snowflake will raise its revenue guidance further as the year progresses given the impressive growth in its residual performance obligation (RPO) last quarter. RPO refers to the “amount of contracted future revenue that has not yet been recognized.”

That metric includes Snowflake's deferred revenue — funds the company has received for prior services that will be provided later — and non-cancellable contracts that are “recognized as invoices and revenue in future periods.” will.” The fact that this metric grew at a faster pace than Snowflake's top line suggests that the company's earnings are likely to accelerate.

More importantly, Snowflake is predicting incredible expansion in its total detectable market thanks to the emergence of artificial intelligence (AI). In a 2024 Investor Day presentation, Snowflake Management asserted that its total addressable market could grow from $152 billion in 2023 to $342 billion in 2028. And the company has a series of products ready to take advantage of AI-powered opportunities within the data cloud. Market.

Many of these products are slated to be made generally available to consumers in the current fiscal year. These include the likes of Cortex AI, Document AI, and Snowflake Copilot. Cortex AI, for example, will enable Snowflake users to build creative AI applications like chatbots with the help of large language models (LLMs) using their proprietary data.

Meanwhile, Snowflake Copilot is designed to help enterprise users write Structured Query Language (SQL) code and improve productivity. And Document AI is a proprietary LLM that users can use to extract data from a wide variety of documents. As Snowflake introduces these products more widely, it may be able to increase spending from its existing customers as well as attract new ones.

It's worth noting that Snowflake exited the first quarter of its fiscal year with 9,822 users, up 21 percent from the year-ago period. However, the number of customers contributing more than $1 million in annual product revenue for Snowflake grew 30% year-over-year to 485. The company may be able to keep up with this trend of rising consumer spending thanks to new growth drivers like AI. Along with this, it is focused on launching new products.

However, Snowflake's detractors may argue that its growth is coming at the expense of its margins. After all, the company's non-GAAP product gross margin fell slightly to 76.9% last quarter. The company lowered its full-year margin guidance to 75% from the previous estimate of 76%.

Not surprisingly, analysts are forecasting Snowflake's adjusted earnings to fall to $0.62 per share in fiscal 2025, down from $0.98 per share last year. While that's a big drop, they should return to $0.99 per share in the next fiscal year. Management attributed the gain to “increased GPU-related costs related to our AI initiatives.”

But at the same time, this investment is poised to open up a strong long-term growth opportunity for Snowflake and should ideally allow the company to generate more revenue from its existing customers as they relate to its AI. Buy offers. Any short-term pain could eventually pave the way for strong bottom-line performance in the long run, which is why investors should focus on the bigger picture here.

The valuation makes the stock an attractive bet at this time.

Investors can buy Snowflake stock at a relatively attractive price-to-sales ratio of 14, well below its multiple of 25 at the end of 2023. Of course, Snowflake's sales exceed the US tech sector average of 8. However, Snowflake is now cheaper than ever by this metric.

Data via YCharts.

Given Snowflake's solid revenue pipeline and promising earnings growth, savvy investors may want to consider buying the stock now. Finally, 71% of the 48 analysts covering Snowflake rate it a buy, and their 12-month average price target for the stock is $200 — 60% above the current price.

If Snowflake's top-line growth continues to beat expectations, the stock could rise again.

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