Could Snowflake Be the Next Nvidia?

After Nvidia’s stellar performance this year (it’s up over 200%), many investors are looking for other stocks that could duplicate its performance. Specifically, many believe this next big-time winner may come from a company associated with artificial intelligence (AI), just like Nvidia.

One company that some point to is Snowflake (NYSE: SNOW), as its data cloud software is incredibly useful for developing AI models. But does Snowflake have the same level of upside as Nvidia? Let’s take a look.

Snowflake has a critical role in the AI arms race

Snowflake’s software is designed to help its clients handle large datasets. Whether that data is structured, semi-structured, or unstructured, Snowflake helps optimize and store it across the client’s cloud provider. Additionally, it can seamlessly migrate this data to another cloud provider if the client wants to switch. This is incredibly useful in its own right. Otherwise, cloud providers would be able to lock users into unreasonable contracts.

Once a customer has deployed Snowflake and begun collecting data, it has tools to drive applications from the data and keep its integrity through cybersecurity offerings. Perhaps the most intriguing application of Snowflake is that dataset owners can sell their information on Snowflake’s marketplace. This has massive AI implications, as AI models are incredibly complex and require as much information as possible to be accurate. Many AI model creators don’t have access to all of the data they want, but with Snowflake, they can find information to start or supplement a model.

Once customers sign on with Snowflake, they usually expand their spending significantly. In Q2 of FY 2024 (ending July 31), Snowflake’s customers spent $142 for every $100 they spent last year. This is an artifact of Snowflake’s billing model, which charges its customers on a consumption basis. The pay-as-you-go model aligns Snowflake’s interests with its clients’. Still, if the economy starts to struggle and various management teams look to cut expenses, Snowflake may see a decrease in usage as changing usage frequency could save on costs.

Overall in Q2, Snowflake’s revenue grew by 36% to $640 million. That’s strong growth for any company but not quite Nvidia’s 100%-plus growth. So that’s one strike against Snowflake from becoming the next Nvidia. However, revenue is just one piece of the puzzle. There are also profits to consider.

Snowflake is massively unprofitable

As for profitability, Snowflake is a long way away from generating any profit. In Q2, its operating expenses totaled $741 million, up 39% from last year. That’s faster than revenue growth, so Snowflake’s profitability is moving in the wrong direction. But with a 42% operating loss margin already, the company has found itself in a rather deep hole.

SNOW Operating Margin (Quarterly)

But Snowflake isn’t in danger of going out of business, either. Because it heavily supplements its employees’ salaries with stock-based compensation, it’s free-cash-flow positive. In Q2, it shelled out nearly $300 million in stock-based compensation, which caused its share count to rise by 3% year over year. Investors should keep an eye on this, as Snowflake can claim some sense of profitability, but investors must be aware that this isn’t true profitability.

Finally, when it comes to valuation, Snowflake is far from a cheap stock. At 22 times sales, it tips the scales as one of the most expensive software stocks. That’s a steep price to pay for Snowflake, and it conveys the sky-high expectations that are built into the stock.

So, to answer whether Snowflake can become the next Nvidia-like stock, I’d say no. Snowflake isn’t growing fast enough, has no sense of profitability, and is quite expensive already. But does that mean you should avoid the stock completely? I don’t think so. Snowflake has a massive upside because of its strong position in the data cloud. However, because of the uncertainty provided by the unprofitability and high valuation, I’d keep your position size relatively small.

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Keithen Drury has positions in Snowflake. The Motley Fool has positions in and recommends Nvidia and Snowflake. The Motley Fool has a disclosure policy.