Prediction: These tech stocks could make big moves thanks to artificial intelligence (AI).
This cloud company is leveraging AI to increase customer spending.
The broader technology sector has made major strides over the past year and a half due to the rise of artificial intelligence (AI). NASDAQ-100 Technology Sector The index has risen an impressive 83% since the beginning of 2023. But not all tech stocks have benefited from this surge. snowflake (eye -3.38%) This is one such example.
Shares of the company, which provides a cloud-based data platform, have risen only 5% since the beginning of last year. Snowflake’s latest results for the first quarter of fiscal 2025 (for the three months ended April 30, 2024) did not do much to inspire investor confidence, as the stock fell more than 5%.
But a closer look at Snowflake’s results shows that investors may have overreacted.
Snowflake is looking to capitalize on a fast-growing market.
Snowflake’s fiscal first quarter revenue increased 33% year-over-year to $829 million, well ahead of the consensus estimate of $787 million. However, the company’s adjusted earnings fell 6% year-over-year to $0.14 per share, missing estimates of $0.18 per share. Snowflake lowered its full-year margin guidance. We are currently forecasting a non-GAAP (adjusted) operating margin for the current year of 3%, compared to our previous forecast of 6%.
Investors may have hit the panic button due to weak margin prospects. But the company is making a smart move by increasing its investment in AI infrastructure, a strategy that could hurt margins in the short term but open up new growth opportunities. CFO Mike Scarpelli said: “We are lowering our annual margin guidance to account for the increased GPU-related costs associated with our AI initiatives. We operate in a rapidly evolving market and we are well positioned to position these investments for the future.”
Snowflake is purchasing graphics processing units (GPUs) to build AI-centric services such as Snow Park, Cortex, and Document AI, and to build its own LLM (Large Language Model). For example, Cortex provides Snowflake customers with access to several LLMs, allowing them to build AI applications such as chatbots using their own data without investing in expensive hardware.
CEO Sridhar Ramaswamy notes that Snowflake is seeing “an impressive increase in Cortex AI customer adoption since its general launch.” More than 750 Snowflake customers are already using Cortex since its general availability on May 7. The company ended last quarter with a total customer base of just over 9,800. This means that a significant portion of our customer base has adopted the AI-focused Cortex. We provide it in a short period of time.
This bodes well for Snowflake, as its strategy of adding AI services to its cloud data platform encourages existing customers to spend more while also attracting new customers into the company. Ultimately, the AI-as-a-Service market targeted by Snowflake is expected to grow at approximately 37% per year through 2029, generating $72 billion in revenue by the end of the forecast period.
The good thing is that Snowflake is already witnessing healthy growth in its customer base while capturing a larger share of wallets, and AI can accelerate this trend.
These indicators point to a bright future
Snowflake’s customer count grew 21% year-over-year last quarter. Even better, the number of customers generating more than $1 million in product revenue for the company grew 30% faster than the previous year. Moreover, Snowflake’s net retention rate in dollar terms was an impressive 128%. This is a sign of higher spending from existing customers. That’s because this metric compares the amount spent on services provided by a company in a given quarter to the amount spent by the same group of customers in the previous year’s period.
This improvement in Snowflake’s customer base and increased customer spending explains why its remaining performance obligations (RPO) increased 46% year-over-year to $5 billion. This is an improvement over last quarter’s RPO growth rate of 41%. According to Snowflake, RPO represents “the amount of contracted future revenue that has not yet been recognized.”
The fact that Snowflake’s RPO growth has accelerated and the metric is growing at a faster rate than revenue suggests that its future revenue pipeline is improving. Not surprisingly, Snowflake increased its annual product revenue target to $3.3 billion, up from its previous estimate of $3.25 billion. Additionally, analysts have increased their growth expectations for Snowflake following the latest results.
SNOW revenue estimates for current fiscal year data via YCharts
Smart investors should therefore consider taking advantage of Snowflake’s underperformance as AI could help this tech stock come back to life.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has a position on Snowflake and recommends it. The Motley Fool has a disclosure policy.
