Nvidia has been red hot, while Snowflake has been ice cold. That may change soon.
It's hard to deny that. Nvidia And artificial intelligence (AI) has been the story of Wall Street in the first six months of 2024. Nvidia's meteoric rise in demand for its AI chips has turned the stock into a multi-trillion dollar beast that has made shareholders very rich in a short period of time. Timing.
But even the best things don't last forever. I'm not predicting Nvidia's demise, but at some point it makes sense to start looking for the next winner. Snowflake (Snow -2.35%) Doesn't stand out as the obvious choice — shares have fallen more than 35% since January. However, the market has caught on All wrong.
Below I'll detail why Snowflake has a bright future and why the stock could outperform Nvidia for the remainder of 2024.
From hype to trash
Snowflake went public in late 2020, near the peak of a euphoric stock market boom that swept growth stocks because of zero percent interest rates. Investors saw Snowflake as an innovative technology company. Its cloud-based platform enables users to securely store, search and integrate their data with various third-party apps. Even Warren Buffett joined in, whose company, Berkshire HathawayParticipated in IPO.
You can see how investors got excited below. Today, there is probably no stock on Wall Street that trades at an enterprise value-to-sales ratio of more than 200. Astronomically high appraisal!
SNOW EV from earnings data by YCharts
Interest rates began to rise in 2022, helping to dampen growth stock prices. Today, Snowflake is trading at a fraction of what it once was and is at its lowest value as a public company. I want to align the value of the stock with the sentiment of the investor. In other words, investors are more pessimistic about Snowflake today than ever before. The question is whether investors should or if their distaste for the stock is misguided.
Snowflake is basically a great business.
Snowflake is not perfect. The company's revenue growth was explosive in 2020 but has slowed dramatically. Revenue grew “only” 32% year-over-year in the most recent quarter, but that's still enough to place Snowflake among the fastest-growing companies in the market.
Notice how much the snowflake has grown. Entering 2021, the company's trailing 12-month revenue was about $500 million, and it's grown sixfold in just a few years. Snowflake's user base has grown from 3,554 to 9,822 during that time. Additionally, the business is very profitable, converting a quarter of sales into free cash flow. It is a profitable and growing company that thrives despite competition from a privately held rival in Databricks.
SNOW Revenue (TTM) data by YCharts
The future looks bright if you believe that artificial intelligence (AI) will become critical to society in the coming decade and beyond. AI trains on data. Snowflake may be important to consumers because it enables companies to organize and search their own data and supplement it with third-party data through Snowflake's marketplace. It can be the ideal platform for companies that optimize their data for AI or the applications they need.
Just look at Snowflake's impressive net revenue retention rate of 128%, which indicates that customers are highly invested in the platform once onboard. Snowflake may not see triple-digit revenue growth again, but it's clear that it has years, possibly decades, of double-digit growth just because of how much data is out there and will be created going forward. will go
It may be time to shine.
A stock will not start trading higher without an increase in demand for the shares. So, what could be the metaphorical match that lights Snowflake's powder keg? The company changed its CEO earlier this year. New CEO Sridhar Ramaswamy is the company's former VP of AI, who tells investors that Snowflake is leaning more towards AI.
Snowflake uses a consumption-based billing model. This has hurt the company's growth over the past several years as companies have tightened their wallets under high interest rates. However, the AI boom could have the opposite effect as companies invest in AI across platforms. You'll see below that revenue growth has swung back and forth over the past quarter. Investors should pay close attention to this potential turning point in Snowflake's earnings growth.
SNOW Revenue (Quarterly YoY Growth) data via YCharts
In other words, continued earnings growth next quarter could give investors hope that Snowflake's growth story is picking up again. Only then, the positive sentiment will increase while the shares are trading at a depressed value compared to previous years.
Ideally, investors think long-term and zoom out on what Snowflake could be five, 10 or 20 years from now. But it's hard to ignore a strong company that's falling so hard while other AI stocks are hitting new highs. Snowflake will likely see a rebound in the future, but the odds are good for a comeback story over the next six months and beyond.
Justin Pope has no positions in any of the stocks mentioned. The Motley Fool has positions and recommends Berkshire Hathaway, Nvidia and Snowflake. The Motley Fool has a Disclosure Policy.