To the inexperienced investor, Snowflake (NASDAQ: SNOW) could be one of the most expensive stocks on the market right now. However, when you consider its financial trajectory and impressive position in the AI race, it becomes more apparent that Snowflake stock looks cheap relative to its growth prospects.
Undoubtedly, AI stocks are all the rage these days, with stocks in chips like Nvidia (NASDAQ:NVDA) hogging the headlines and capturing most of the investor euphoria. We mustn’t forget software plays, however, as they may be next on the agenda once investors look elsewhere to find value in the wild world of AI.
The AI boom has just begun and it’s not just about Nvidia!
Nvidia stock has exploded on unprecedented demand for AI chips. Once consumers and businesses get the chips and AI firepower, they could go a while without buying more, especially for companies that overordered. In that regard, investors shouldn’t expect Nvidia to keep rising steadily. It’s the AI game we’ve all been hearing about non-stop as of late.
After the AI chip boom may come a software boom as companies look to harness the power of generative and predictive AI. Indeed, the big names in tech have led the way on the software front, with the FAANG cohort leading the way, pushing price-earnings (P/E) multiples towards the upper end of the historical range.
The “Magnificent Seven” stocks, as MadMoney host Jim Cramer calls them, are wonderful tech companies that have a strong foothold in the AI scene. Looking beyond big tech, however, I see many undervalued AI growth stories, such as Snowflake, that could be next for a huge upward move as the AI rally continues.
Snowflake Stock: An AI stock to play the software side of things
At this juncture, Snowflake not only stands out as an AI software winner, but it could catch investors and analysts alike off guard in a similar way to Nvidia. It’s hard to gauge the kind of explosive growth AI can bring to the table.
The floodgates for AI really opened earlier this year as ChatGPT headlines hit us from left, right and centre. With AI at its tipping point, we could see the “AI jolt” move from hardware (chip replicas) to data replicas. Snowflake is a powerful company backing the data cloud.
Let’s think about what it takes to build a generative AI. Not only does a business need hardware (think Nvidia chips), it also needs data, publicly available and private. It is private data that is most valuable and could help companies gain an edge when it comes to generative AI.
Not only does Snowflake’s data cloud help companies manage huge data sets more easily, but its Data Marketplace can also serve as a hub for people to transact with one of the most valuable assets in the age of AI : the data.
Arguably, private, proprietary data could be more valuable than the AI chips themselves. There is private data that money can’t buy, and it’s the data boon that could separate the rich from the poor in the world of generative and predictive AI technologies.
Snowflake: Smart partnerships should excite investors
Nvidia has partnered with many companies these days. Everyone wants to be in on the action of AI, and there’s no better way than to strike a deal with visionary Nvidia CEO Jensen Huang. Snowflake and Nvidia announced a partnership at the latest Snowflake summit to help companies build Large Language Models (LLMs) using proprietary data in the Snowflake Data Cloud.
In fact, Nvidia also stands out as a winner on the software side of the AI race. Regardless, I think Snowflake faces a bigger upside as a less obvious AI stock that investors may still need time to better appreciate. Perhaps it will take a deep quarterly pace for Snowflake’s stock to get the respect it deserves. For now, it’s one of my favorite AI titles from a software perspective.
In addition to Nvidia, Snowflake also has an AI partnership with AI heavyweight Microsoft (NASDAQ: MSFT). Overall, it looks like Snowflake is ready for the wave of AI to boost his stock.
Is SNOW stock a buy, according to analysts?
Turning to Wall Street, SNOW stock comes across as a moderate buy. Out of 32 analyst ratings, there are 25 buys, six holds, and one sell recommendation.
The average Snowflake stock price target is $189.86, which implies 3.1% upside potential. Analysts’ price targets range from a low of $105.00 per share to a high of $235.00 per share.
The bottom line on SNOW Stock
Snowflake has the basics of AI to fly higher from here. While the stock is trading 26.1 times as high, it’s not as expensive as it sounds, at least according to Scotiabank analyst Patrick Colville, who recently issued a massive stock update (price target at $212 from $ 137).
Mr. Colville sees $10 billion in product revenue, with free cash flow margins of about 30% in fiscal 2029. I think Colville is right to give Snowflake the long view. However, I would argue that there is room for further increases in the price target if the AI boost hits Snowflake sooner rather than later!
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