Snowflake will have to grow at a rapid clip for slightly more than 11 years to achieve that goal.
The value proposition for Snowflake (SNOW -0.73%) stock continues to gain traction with customers and investors. A rapid growth rate and a compelling product offering remain a draw for buyers like Warren Buffett's Berkshire Hathaway, which invested in the company before its September 2020 initial public offering (IPO).
Such potential also may lead investors to speculate whether the market cap can grow to $1 trillion, a feat accomplished by only a handful of tech companies. While no analyst or company can guarantee such a result, Snowflake's growth potential makes such a notion worthy of further investigation.
The path to $1 trillion
Snowflake's market cap is currently at about $65 billion. To make it to $1 trillion by the end of 2035, Snowflake stock would have to grow by an average of just over 28% per year over the next 11 years.
Admittedly, its trading history does not bode well for such gains. Since launching its IPO just over three years ago, Snowflake stock has fallen by just over 20%. However, it was briefly up by more than 50% at the height of the last bull market, so the stock is coming off a significant skid. Also, a 40% gain in the stock price over the last year could bode well for the stock's growth.
Why Snowflake will likely grow
Moreover, a solid business case appears to back those gains. Snowflake is a leader in the data cloud. Its software enables customers to store, secure, and manage data from one centralized location. It saves entities from having to store data in silos, which could lead to multiple copies and users not knowing which copy is up to date.
Indeed, peers such as Amazon and Microsoft offer competing data cloud products. Nonetheless, those data clouds tend to function best when these companies are the infrastructure providers.
Conversely, Snowflake operates as a sort of neutral player. It can work seamlessly regardless of which company provides an entity's infrastructure. For this reason, Amazon's AWS partners with Snowflake despite offering its own data cloud software.
This offering continues to drive customer growth. As of the end of the third quarter of fiscal 2024 (ended Oct. 31), more than 8,900 clients use Snowflake, up 24% yearly. Over 430 of those customers spend over $1 million annually on the platform, and that cohort grew 52% over the same time frame.
Snowflake's financials
Given those increases, it will likely not surprise investors that revenue in the first nine months of fiscal 2024 exceeded $2 billion, a yearly increase of 38%.
Furthermore, since customers pay by the amount of usage, net revenue retention came in at 135%. This means the average long-term customer increased spending on the platform by 35%.
Unfortunately for the company, revenue still falls short of operating expenses. Consequently, Snowflake lost $667 million in the first three quarters of fiscal 2024, up from a $590 million loss in the year-ago quarter.
Still, stock-based compensation was $863 million over the same period, a non-cash expense. That and other non-cash expenses mean that Snowflake's adjusted free cash flow was a positive $486 million in the first three quarters of the fiscal year. That factor indicates that Snowflake is in better financial shape than the net losses might indicate.
Additionally, it supports a price-to-sales ratio of 25. While that is not a low multiple by any measure, it's near historical lows for the stock.
Also, the company forecasts that revenue growth will slow to the 30% range by fiscal Q4. Although the slowing increases may worry some investors, that rapid growth rate should discourage investors from selling on valuation.
Will Snowflake's market cap exceed $1 trillion by 2035?
Snowflake could make it to $1 trillion by 2035, but only if it can maintain a rapid pace of customer and revenue growth.
Indeed, the growth in its customer base and the revenue retention levels bode well for Snowflake's stock. Unfortunately, maintaining such growth rates for 11 straight years will be challenging when the increases continue to slow. Also, despite historical lows, the 25 P/S ratio makes multiple expansions less likely.
However, Snowflake is a SaaS stock investors should want to buy and keep for its value proposition. Ultimately, investors will likely earn outsized gains regardless of whether it can achieve the $1 trillion market cap by 2035.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has positions in Berkshire Hathaway and Snowflake. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, Microsoft, and Snowflake. The Motley Fool has a disclosure policy.
