AI Initiatives Like Cortex AI And Microsoft Partnerships Will Improve Future Market Position

Key Takeaways

• AI-driven innovations and partnerships with major tech companies bolster Snowflake's product adoption and revenue growth.
  
• Expanding product capabilities and operational efficiency improvements enhance competitive edge, supporting multiproduct adoption and improving margins.
  
• Competitive pressures, CFO transition, and reliance on new product adoption may challenge Snowflake's revenue consistency and market position.

Catalysts

Provides a cloud-based data platform for various organizations in the United States and internationally.

• Snowflake's strategic focus on AI-driven innovations, such as Cortex AI and Cortex Agents, positions the company to capitalize on the growing demand for AI and data analytics solutions, enhancing product adoption and driving future revenue growth.
  
• The company's expanded product capabilities, with more than 400 product features launched in the past year, bolster its competitive edge and facilitate multiproduct adoption among customers, which can lead to increased revenue and improved net margins.
  
• Snowflake's partnerships with major tech companies like Microsoft and integrations with popular platforms such as Microsoft 365 CoPilot and Teams may increase its ecosystem influence and drive user adoption, potentially positively impacting revenue and earnings.
  
• Their strategy to penetrate new markets and verticals, evidenced by strong growth in technology, financial services, and EMEA regions, suggests ongoing revenue expansion opportunities and potential stabilization or improvement in net revenue retention rates.
  
• The emphasis on operational efficiency, such as using AI for internal processes and targeted investment in engineering and sales, is expected to yield margin improvements and enhance free cash flow generation, supporting stronger earnings in the future.

Snowflake Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Snowflake's revenue will grow by 23.4% annually over the next 3 years.
• Analysts are not forecasting that Snowflake will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Snowflake's profit margin will increase from -35.5% to the average US IT industry of 8.0% in 3 years.
• If Snowflake's profit margin were to converge on the industry average, you could expect earnings to reach $544.9 million (and earnings per share of $1.65) by about April 2028, up from $-1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 156.3x on those 2028 earnings, up from -38.8x today. This future PE is greater than the current PE for the US IT industry at 34.7x.
• Analysts expect the number of shares outstanding to decline by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

Snowflake Future Earnings Per Share Growth

Risks

• The transition period as the CFO plans to retire could introduce uncertainties or challenges in maintaining the company's financial strategy and execution, potentially impacting earnings.
  
• Large customers consuming their contracted capacity before their contract end may suggest unpredictability in revenue recognition as these customers temporarily switch to on-demand purchasing, which could affect quarterly revenue consistency.
  
• The expected acceleration of new product adoption contributing to revenue growth in the latter half of the year introduces the risk of slower-than-anticipated adoption, which could impact projected revenue.
  
• Operational efficiencies and margin improvements are highly reliant on continued smooth collaboration across engineering, product, marketing, and sales, and any disruption in these areas could impact net margins.
  
• Competitive pressures from other data and AI platforms may increase, challenging Snowflake's market position, and could impact revenue if competitors gain market share.

Valuation

• The analysts have a consensus price target of $205.786 for Snowflake based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $235.0, and the most bearish reporting a price target of just $115.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.8 billion, earnings will come to $544.9 million, and it would be trading on a PE ratio of 156.3x, assuming you use a discount rate of 7.8%.
• Given the current share price of $149.54, the analyst price target of $205.79 is 27.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.