We came across a bullish thesis on Snowflake Inc. (NYSE:SNOW) on ValueInvestorsClub by Wells. In this article, we will summarize the bulls’ thesis on SNOW. The company’s shares were trading at $147.56 when this thesis was published, vs. the closing price of $158.96 on Apr 28.
Copyright: ralwel / 123RF Stock Photo
SNOW provides a cloud-based data platform for various organizations in the United States and internationally. Its platform includes AI Data Cloud that enables enterprises to consolidate data for business insights, building data applications and solving business problems.
The Database Management Systems market was worth $80 billion in 2023 with the cloud portion accounting for $47 billion and has been growing at 35% since 2019. This segment should grow to $100 billion by 2027, clocking a growth rate of +20%. SNOW offers products that target $75 billion of the market opportunity ($50 billion structured data and $25 billion unstructured data). SNOW has commanded a dominant position among enterprises due to less complexity, better security and cheaper solutions. While competition from players like Databricks has been mounting which challenges the dominant position of SNOW, there is no trend indicating a clear shift away from SNOW. The Y-o-Y quarterly growth has subsided from 100% in 2024 to 28% in Q4-24 and the net retention reduced from 178% to 126%. SNOW is looking to improve the latter by deploying customer representatives close to the clients, enabling them to identify new use cases. Realizing a 126% NRR should not be challenging amidst emerging database solutions since SNOW has historically resorted to acquisitions in a bid to catch up with the market. It should manage to pace itself with the industry growing annually at 24% backed by a growth of 28% in the product segment.
Since the departure of Frank Slootman, the new CEO Sridhar Ramaswamy has been focusing on AI/ML products that are expected to provide meaningful contributions in the second half of 2025. Over 4k customers use one of these products, a 25% growth from the last quarter. While it is too early to comment on the durability of this growth, the management sounds confident and expects tailwinds from this niche to propel the revenue growth higher.
Assuming a base case scenario of 24% revenue CAGR, 30% FCF margins and an FCF multiple of 35x, the fair value stands at $383, implying an IRR of 19%. In an upside case, SNOW should achieve a CAGR of 27%, commanding a valuation of $590 using an FCF multiple of 40x, thereby generating an IRR of 30%.
While we acknowledge the potential of SNOW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SNOW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.
Hedge Fund Resource Center