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Snowflake‘s (NYSE: SNOW) my favourite artificial intelligence (AI) growth stock right now. A data storage and analytics solutions provider, it’s seeing huge growth as firms move to adopt AI.
Now, this stock’s expensive. Currently, it sports a forward-looking price-to-earnings (P/E) ratio of 181. I don’t see that high earnings multiple as a deal-breaker however. When the stock pulled back a little earlier this month, I bought more of it for my ISA.
At the heart of the AI boom
I expect Snowflake to be a major beneficiary of the AI boom, because it offers products that can help organisations get started with the technology.
Its AI Data Cloud offer is a fully-managed data platform that enables companies to structure their data effectively (eliminating data siloes), run analytics, and securely create and deploy large language models (LLMs). Trusted by over 12,000 customers (including more than 750 of the Forbes Global 2000), it’s a powerhouse of a platform.
Share price pullback
Now, recent earnings here were very strong with growth accelerating significantly. For the quarter, product revenue growth was 32%, up from 26% in the prior quarter. This led to a sharp rise in the share price with the stock hitting $250 in late August.
However, to my surprise, it has pulled back to $216 recently. Given the drop, I decided to add to my position. I snapped up another tranche of shares at $224 per share as I’m convinced the share price is going higher in the long run.
Is the high valuation a risk?
What about high valuation though? Should I be concerned about this? Well, here’s the thing. Snowflake’s only just turning profitable so the P/E ratio doesn’t really mean much (because profits – the ‘E’ in P/E – are still so small).
With a growth stock like this, P/E ratio isn’t usually a good indicator of future returns. If revenue growth stays strong and profits climb, the stock could do well despite the high multiple.
That’s what I expect to happen here. In my view, Snowflake’s revenue growth’s likely to remain strong at around 30% year on year in the medium term, boosting earnings and the share price.
It seems analysts agree with my view that the stock can climb higher. Currently, the average price target is $263 but many analysts have targets in excess of $275 (about 27% above the current share price).
Worth a look
Of course, while the P/E ratio may not mean much, there are plenty of other risks here. If product revenue growth was to suddenly drop sharply, I’d expect the stock to underperform because with a price-to-sales ratio of 18, it’s priced for strong growth.
Taking a five-year view however, I think this stock has the potential to generate strong returns. To my mind, it’s worth considering as a growth play.
