In this digital age, data is everywhere. As a result, companies like Snowflake (SNOW) that specialize in cloud computing and data analytics continue to be highly sought after. Snowflake’s platform enables the storage, management, and analysis of large amounts of data.

While the artificial intelligence (AI) rush drove most cloud stocks sky-high last year, Snowflake’s stock increased by around 38%, slightly underperforming the Nasdaq Composite’s ($NASX) 44% gain. Investors have been wary of the stock due to its high valuation and the fact that SNOW is still unprofitable.

Nonetheless, Wall Street believes that increased public cloud spending and AI development could propel the company to profitability as early as fiscal year 2024. Let’s find out why analysts are so optimistic about Snowflake stock.

Unprecedented Revenue Growth

For Snowflake, product revenue is a significant driver of growth, accounting for roughly 95% of total revenue. The remainder comes from professional services and others. The company defines product revenue as the revenue derived from platform consumption in a single, integrated offering. Its product revenue has grown drastically, up from $95.7 million in fiscal 2019 to $1.93 billion for the nine months ended Oct. 31.

In the third quarter of fiscal 2024, Snowflake’s product revenue surged 34% year-over-year to $698 million. Total revenue came in at $734.1 million, up from $557 million in the same quarter last fiscal year. Snowflake’s customer count with over $1 million in trailing 12-month product revenue increased to 436 in Q3, up from 148 in the same quarter two years ago.

Interestingly, this trend is likely to continue, as evident from the company’s remaining performance obligations (RPO) – which measures the amount of contracted revenue that has yet to be realized. RPO totaled $3.7 billion, up 23% from the prior-year quarter. Snowflake expects 57% of the current RPO to generate revenue within the next 12 months.

In the earnings call, CEO Frank Slootman stated, “There’s no AI strategy without a data strategy.” The CEO believes that the company’s new products, Snowflake Cortex, and Snowpark Container Services, will enable customers to fully leverage AI and machine learning.

Another important point to note is that while most tech companies have gone on a layoff spree to cut costs, Snowflake intends to increase its headcount. It is still on track to hire 1,000 new employees this fiscal year, including any mergers or acquisitions.

On this note, Needham analyst Mike Cikos stated, “The management’s willingness to adjust hiring in line with revenue growth is seen as a positive move towards building a scalable and efficient business model.” The analyst has a “buy” rating for SNOW with a target price of $225.

The Road to Profitability

At the end of the quarter, Snowflake had $4.5 billion in cash, cash equivalents, and short-term and long-term investments. The hefty cash balance allowed the company to repurchase 2.6 million shares.

Furthermore, Snowflake generated an adjusted free cash flow of $111 million during the quarter. Having free cash flow on hand will enable the company to fund future AI projects and pay off debts, among other goals.

Snowflake will release its fourth quarter and full-year fiscal 2024 results on Feb. 28. Management expects product revenue for the quarter to arrive between $716 million and $721 million.

An increase in consumption patterns prompted the company to increase its revenue guidance for the full year, which could be around $2.6 billion, a 37% increase over fiscal 2023. Snowflake also expects to generate 27% of revenue in adjusted free cash flow for the year.

For fiscal 2024, analysts forecast a total revenue of $2.79 billion. Snowflake’s revenue has increased rapidly, but the company is still not profitable. However, analysts predict the situation will turn around in fiscal 2024, with a profit of $0.79 per share expected for the full year.

Profits are expected to rise by 42% to $1.13 per share in fiscal 2025, along with a 30% increase in revenue. SNOW is trading at 18 times forward estimated sales, compared to its four-year historical price-to-sales ratio average of 72x.

For now, Snowflake’s strategic partnerships with top cloud providers like Google (GOOGL), Amazon (AMZN), and Microsoft (MSFT) are working in its favor. However, having its cloud infrastructure platform could be beneficial for the company in the long run.

Wall Street’s View on Snowflake Stock

Overall, Wall Street rates the stock a “moderate buy.” Out of the 38 analysts in coverage, 22 rate it a “strong buy,” while three rate it a “moderate buy,” 11 rate it a “hold,” and two analysts recommend a “strong sell.”

Snowflake’s strong quarterly results boosted its share price, which has narrowly surpassed its mean target price of $204.56. However, its high target price of $250 implies a potential 21.6% gain over the next 12 months.

The Verdict on SNOW Stock

As more organizations adopt AI for decision-making, their data and processing requirements will increase, which should boost demand for Snowflake’s products. Notably, global public cloud spending is expected to total $1.35 trillion by 2027. This implies that Snowflake will have plenty of opportunities in cloud computing in the near future, which should propel its revenue and earnings growth. Looking ahead, the company aims to generate $10 billion in product revenue by fiscal 2029.

Despite being an excellent cloud stock with rapid AI-driven revenue growth that could lead to higher earnings growth in the coming years, SNOW’s high valuation seems to be deterring investors. However, I believe that the rapid expansion of data analytics and AI provides a compelling risk-reward case for Snowflake.