What Happened?
Shares of data warehouse-as-a-service Snowflake (NYSE:SNOW) jumped 5.9% in the morning session after Wedbush analyst Dan Ives upgraded Snowflake and Elastic, two of the SaaS stocks that reported strong financial results during the Q3 2024 earnings.
Wedbush upgraded Snowflake from Neutral to Outperform and assigned a $190 price target. The research firm cited "increased bullishness on the next phase of this AI Revolution in the software sector into 2025." With hyperscalers like Google and Amazon leading the first wave of the AI revolution, analyst Dan Ives believes now is the time for the broader SaaS space to join the party. Some of the catalysts supporting the thesis include: 1. Exploding AI use cases 2. Start of the enterprise consumption in 2025 3. Launch of LLM models 4. Adoption of Generative AI.
Some of the catalysts highlighted by the analyst correlate with the trends we have observed during the earnings season as more companies are making progress on their strategy of courting more large enterprise customers amid the growing AI boom. Also, more companies are reporting more meaningful contributions of AI products to their top line, with forecasts pointing to even more accelerated adoption.
After the initial pop the shares cooled down to $172.82, up 3.2% from previous close.
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What The Market Is Telling Us
Snowflake’s shares are somewhat volatile and have had 13 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 4 days ago when the stock gained 32.4% on the news that the company reported a strong "beat and raise" quarter. It was encouraging to see Snowflake exceed analysts' revenue expectations this quarter with a net revenue retention rate (NRR) that didn't fall at all from last quarter.
During the earnings call, Snowflake emphasized its commitment to simplifying data workflows and integrating AI capabilities, such as Snowflake Cortex. These initiatives are driving competitive displacement and increasing customer adoption. Additionally, new products like Snowpark are contributing to revenue growth. Snowpark is expected to account for roughly 3% of total product revenue.
On the AI front, Snowflake reported over 1,000 generative AI use cases deployed in production, and 3,200 customers utilizing its platform for AI and machine learning applications. This is another aspect of the business with a strong potential to accelerate growth as customers recognize the value that AI adds to their operations.
Moving to the bottom line, operating margin in the quarter beat, and combined with the top-line improvements and cost efficiencies, EPS easily surpassed analysts' estimates.
Looking ahead, Q4 product revenue guidance was ahead of analysts' expectations, adding to the good news. For the full year, guidance for product revenue, gross margin, and operating margin were all raised. Overall, this was a very good quarter, a relief for a company that has shown some uneven earnings performance in the last year.
Snowflake is down 8.6% since the beginning of the year, and at $172.82 per share, it is trading 26.8% below its 52-week high of $236 from February 2024. Investors who bought $1,000 worth of Snowflake’s shares at the IPO in September 2020 would now be looking at an investment worth $680.91.
Today’s young investors won’t have read the timeless lessons in Gorilla Game: Picking Winners In High Technology because it was written more than 20 years ago when Microsoft and Apple were first establishing their supremacy. But if we apply the same principles, then enterprise software stocks leveraging their own generative AI capabilities may well be the Gorillas of the future. So, in that spirit, we are excited to present our Special Free Report on a profitable, fast-growing enterprise software stock that is already riding the automation wave and looking to catch the generative AI next.