The rapid adoption of artificial intelligence is driving demand for larger and increasingly sophisticated data workloads. At the same time, rising enterprise data volumes are creating significant opportunities for Snowflake Inc. (NYSE:SNOW).
On September 28, Phillip Securities initiated coverage with a Buy rating and a $423 price target. The research firm said Snowflake is well positioned to capitalize on the expanding global data lake market, expected to be worth $45.8 billion by 2030.
The sentiment comes as growth in generative AI fuels the need for companies to store, process, and analyze large amounts of data. The company is already positioning its AI data cloud as a layer where companies can store, govern, and analyze huge troves of data. In return, it’s seeing a higher consumption of its core data platform.
Recently we shared insights on how Snowflake’s profitability is improving amid heightened product adoption and rising enterprise data volumes: Read Here: Snowflake’s (SNOW) Profit Outlook Strengthens as Product Adoption Accelerates
AI Strategy
Snowflake Inc. is also expanding its AI capabilities through its Cortex AI platform, which enables customers to use large language models to analyze documents and other unstructured data. Snowflake said Cortex Code, its AI coding agent, had attracted more than 7,100 users, highlighting growing adoption of its AI capabilities.
The company’s competitive edge stems from the fact that it is not trying to compete at the chip layer, let alone at the foundation AI model layer. Instead, it is focused on the opportunity around enterprise data and governance infrastructure underneath AI. By monetizing the growing amount of data, compute, and AI activity, the company can generate significant value.
Revenue Growth Justifies Premium Valuation
Snowflake stands out as a high-growth, cloud-native software company trading at a price-to-sales multiple of 21X, slightly below its five-year average of 27X. It is also slightly lower than Datadog’s P/S of 23X. Snowflake’s P/S multiple is modestly below Datadog’s, but both valuations still reflect substantial expectations for future growth.
In the second quarter of Fiscal 2027, its product revenue reached $1.49 billion, up 37% year over year. The company is projecting fiscal 2027 product revenue of $6.07 billion, representing 36% year-over-year growth, while third-quarter product revenue is expected to grow 37% to 38%.
Nevertheless, investors are also paying a steep premium relative to Snowflake’s current profit. The stock trades at a forward P/E multiple of 153X compared to the sector median of 23X, but also significantly lower than the five-year average of 368X. On the other hand, DDOG trades at a slightly lower forward P/E of 108X.
The premium valuation reflect expectations that Snowflake and Datadog can sustain strong revenue growth.
Competition Risks
After a 50% plus rally year to date, there is little room for execution disappointments, particularly as Wall Street remains broadly optimistic about Snowflake’s AI opportunity.
A slowdown in AI-related consumption could therefore have an outsized impact on investor sentiment. Because Snowflake Inc.’s consumption-based model is tied to customers’ data and computing activity, weaker-than-expected AI workloads could translate into slower revenue growth.
The company also faces increasing competition from major cloud platforms. Large providers can bundle data warehousing, analytics, and AI into broader offerings, potentially pressuring the company’s pricing and customers’ technology spending.
Hedge Fund Positioning
Snowflake Inc. has also attracted increasing institutional interest. During the first half of the year, the number of hedge funds holding positions in the company increased to 103 in the second quarter from 80 in the first quarter.
Notable changes include AQR Capital Management reducing its exposure to Snowflake by 10% to about $1.11 billion, while Point72 Asset Management increased its stake by 2,449% to roughly $716.1 million.
Meanwhile, short interest has remained relatively moderate. The number of SNOW shares held short was 18.78 million as of September 15.
The Verdict
Snowflake Inc. is staring at tremendous growth opportunities as AI fuels demand for sophisticated data. Its AI Data Cloud and consumption-based model give it multiple avenues to benefit as businesses expand their use of AI-driven data workloads. The key question for investors is whether it can sustain its elevated growth rate as its valuation rises and competition from major cloud providers intensifies.
Despite its premium valuation, Snowflake still looks like a buy for growth-oriented investors who believe AI-driven data consumption can sustain its strong product-revenue growth. However, after a 50%-plus rally, the stock offers less room for execution mistakes.
READ NEXT: Is CoreWeave (CRWV)’s Recent Pullback a Buying Opportunity? and Should You Buy Oracle (ORCL) Amid Project Jupiter and Negative Cash Flow Concerns?
