After more than a year of uncertainty, 2023 has marked a return to form for Wall Street. The S&P 500 index has gained nearly 12% so far this year and is up 20% since last October's bear market low. While some investors are already heralding the arrival of the next bull market, others are waiting for the index to reach a new high, which is less than 12% above the current level. While the market is currently taking a breather after its recent gains, it's only a matter of time before the bull run gains traction.
The uneven recovery represents an opportunity for savvy investors, and Snowflake (SNOW -1.58%) is one example. The stock is currently trading 62% below its all-time high, but strong results and a new bull market could drive Snowflake higher in the years to come. In fact, bull markets have lasted 8.9 years, on average, generating cumulative returns of 468%, and many stocks will generate significant gains once the next bull run begins.
Here's why Snowflake could be among the big winners.
Image source: Getty Images.
Turning that data into power
The phrase "knowledge is power" was first coined by philosopher Sir Francis Bacon in 1597, but the saying has never been more relevant. Over the past decade, there's been an explosion of new data produced. Indeed, by some accounts, 99% of all data has been generated over the past decade, and this tidal wave of information generation will only increase from here.
Businesses are working to turn this treasure trove of knowledge into actionable data. Still, they are often hamstrung by legacy software systems and a growing number of cloud providers that make accessing and compiling the siloed data all too complicated. That's where Snowflake comes in.
The company's data warehouse offers cloud-based services, including data storage, processing, and analytics solutions that Snowflake says are "faster, easier to use, and far more flexible than traditional offerings." The company's database engine can gather information from any number of disparate sources, including third-party applications and cloud infrastructure platforms, thereby making it easier to extract useful and actionable information. Furthermore, Snowflake offers transparent pricing based on data volume and doesn't charge a subscription fee, so businesses can scale the use of its services as they grow.
Snowflake is also well positioned to benefit from the accelerating adoption of artificial intelligence (AI). The company recently expanded its agreements with Microsoft, AmazonWeb Services, and Nvidia to offer large-scale custom generative AI models and machine learning capabilities to cloud users. Snowflake can help businesses build custom large language models (LLMs) and generative AI tools that will help "maximize the value of their data."
Snowflake's growth streak continues
The economic downturn of the past couple of years has affected many companies, and Snowflake wasn't spared. Yet even as businesses cut back on discretionary spending, Snowflake was able to continue to generate solid growth.
For its fiscal 2024 second quarter (ended July 31), revenue grew 36% year over year to $674 million. At the same time, Snowflake's remaining performance obligation (RPO) of $3.5 billion rose 30%, while its net revenue retention rate of 142% showed that existing customers are spending 42% more than they did in the same period last year.
While Snowflake isn't profitable, the company generated strong and growing operating and free cash flow of $83 million and $69 million, respectively, which illustrates that its lack of profits is the result of noncash charges, including depreciation. This also suggests that profitability is only a matter of time.
Snowflake's robust user growth supports its strong financial performance. While total customers of 8,537 grew 25% year over year, those spending more than $1 million over the preceding 12 months grew 62%, laying the foundation for its future success.
Riding the wave of recovery
Like many technology stocks, Snowflake was dragged down by the bear market, even as the company continued its robust financial growth. This suggests that its continued strong performance would be buoyed by a bull market, which is merely a matter of time.
To be clear, Snowflake has never been cheap, selling for a lofty multiple all the way back to its IPO. However, the stock is currently selling for 13 times next year's sales, near its cheapest valuation ever. Furthermore, Snowflake has grown its revenue by 823% since its debut just three years ago, showing why it's worthy of a premium valuation.
With an improving economy, digital transformation, and AI revolution as catalysts, now is likely a great time to buy Snowflake stock ahead of the inevitable bull market to come.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Amazon.com, Microsoft, Nvidia, and Snowflake. The Motley Fool has positions in and recommends Amazon.com, Microsoft, Nvidia, and Snowflake. The Motley Fool has a disclosure policy.
