Is Snowflake A Buy Following AI Deal With Nvidia?

Snowflake
SNOW
stock has gained about 27% year-to-date, underperforming the Nasdaq-100, which remains up by about 37%. Snowflake’s earnings have been stronger than expected. Over Q1 FY’24, revenues jumped almost 48% year-over-year to $623.6 million, while earnings stood at $0.15 per share. Key metrics have also remained strong. Snowflake’s core revenue retention rate stood at a healthy 151%, indicating that the company continues to expand business with its existing customers. Things are also getting better on the product front. For instance, Snowflake has been looking to bolster its capabilities in the generative AI space. Last week, Nvidia said that it was partnering with Snowflake to offer generative AI technology, specifically its artificial intelligence software, and chips, to Snowflake’s cloud-based data warehousing customers. The deal gives Snowflake’s customers flexibility to build customized large language models that use their own proprietary data. The deal is notable, given that Nvidia is seen as the go-to player for AI-related computing technologies. Snowflake has also expanded its partnership with Microsoft
MSFT
to focus on “large-scale” AI models.

So is Snowflake stock a buy at around $176 per share? Snowflake trades at about 15.5x projected FY’24 revenue presently, well below the 50x plus multiples the stock traded at back at its peak in 2021. While Snowflake is likely to be a big beneficiary of the continued pivot from on-premise databases to cloud-based warehousing solutions, the company’s growth rate is slowing. The company is guiding product revenues of $2.6 billion for the full fiscal year, marking a growth of 34% year-over-year, down from the 70% growth levels seen through FY’23. Margins are also unlikely to see a very significant improvement, with operating margins projected at about 5% and adjusted free cash flow margins standing at 26%. Snowflake’s rising share count is also a concern. Weighted average shares outstanding stood at 361 million diluted shares in fiscal 2024 compared to an average of less than 319 million in fiscal 2023, due to the company’s heavy use of stock-based compensation. We value Snowflake stock at about $180 per share, roughly in line with the market price. See our analysis Snowflake Valuation: Is SNOW Stock Expensive Or Cheap? for more details. See our analysis of Snowflake Revenue for more details on Snowflake’s business model and how its revenues are expected to trend.

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