On Thursday, Goldman Sachs (NYSE:GS) reiterated its Conviction Buy rating on Snowflake Inc . (NYSE: NYSE:SNOW) stock, maintaining a $220.00 price target. The firm's endorsement follows Snowflake's third-quarter results, which bolstered confidence in the company's ability to sustain mid-20s percentage revenue growth at a $4 billion revenue scale while delivering 25% free cash flow (FCF) margins.
This performance places Snowflake among the top decile in software, justifying a stock re-rating closer to its Rule of 50+ peers like Datadog (NASDAQ:DDOG) and ServiceNow (NYSE:NOW), which trade above 13 times enterprise value to sales (EV/S).
The positive outlook is supported by Snowflake's significant potential in its core Data Warehousing market, driven by ongoing legacy system migrations and new product cycles, including Generative AI, Unistore, Container Services, and Iceberg Tables. These innovations are beginning to gain market validation.
Snowflake's third-quarter results exceeded expectations, with Product Revenue surpassing consensus by 5%, operating margins outperforming by 300 basis points, and committed remaining performance obligations (cRPO) growth accelerating to 36% from 30% in the first half of fiscal 2025. Additionally, Snowflake raised its fourth-quarter Product Revenue guidance to 23%, higher than the analysts' expectation of 20.8%.
The company's stock price surged approximately 20% after hours, as investors responded positively to the robust beat-and-raise, alleviating concerns about competition from Databricks affecting future growth prospects.
Key factors contributing to Goldman Sachs' optimism include the stabilization of Snowflake's net revenue retention (NRR) at 127%, indicating a steady core business.
Despite concerns, the impact of Iceberg Tables on storage revenues was negligible, with compensatory growth from Data Engineering, which has surpassed a $200 million run-rate, and early indications of Iceberg adopters bringing in new workloads that could drive growth in the medium to long term.
The accelerating momentum in artificial intelligence (AI) is another positive sign, with over 3,200 accounts using AI services, marking a 28% quarter-over-quarter increase. This growth in AI is complemented by revenue contributions from AI products and a new partnership with Anthropic, which plans to integrate its models into Snowflake's Data Cloud.
In other recent news, Snowflake Inc. reported strong fiscal third-quarter results, with product revenue reaching $900 million, a 29% year-over-year increase. The company's remaining performance obligations also saw a significant 55% year-over-year acceleration, totaling $5.7 billion.
Snowflake's non-GAAP operating margin improved to 6%, while its net revenue retention rate remained stable at 127%. The company has raised its full-year product revenue guidance to approximately $3.43 billion.
Snowflake's recent developments include the acquisition of DataVolo and a partnership with Anthropic to integrate powerful AI models into the Snowflake Cortex.
BTIG maintained its Neutral rating on Snowflake's stock, while Evercore ISI raised the price target to $190 from the previous $170, maintaining an Outperform rating.
These are among the recent developments for Snowflake, which continues to focus on cost efficiency and innovation in data engineering and AI technologies.
InvestingPro Insights
Snowflake's financial metrics and market performance provide additional context to Goldman Sachs' optimistic outlook. According to InvestingPro data, Snowflake's revenue growth remains strong at 31.21% over the last twelve months, aligning with Goldman's assessment of sustained mid-20s percentage growth. The company's market capitalization stands at $43.28 billion, reflecting its significant position in the software industry.
InvestingPro Tips highlight that Snowflake holds more cash than debt on its balance sheet, which supports its financial stability and potential for continued investment in innovative products. This strong cash position aligns with the company's ability to fund new initiatives in AI and other growth areas mentioned in the article.
However, it's worth noting that Snowflake is currently trading at a high revenue valuation multiple, as indicated by another InvestingPro Tip. This valuation reflects the market's high expectations for the company's growth potential, which is consistent with Goldman Sachs' conviction buy rating and the positive market reaction to the recent earnings report.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Snowflake, providing a deeper understanding of the company's financial health and market position.
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