Money flows down the income statement, from sales on the top line to net income on the bottom line. That means sales growth ultimately dictates a company’s ability to increase profits and create value for shareholders.
With that in mind, it’s worth noting that Morningstar analyst Julie Bhusal Sharma says Snowflake (NYSE: SNOW) can increase sales by 909% over the next decade, and Morgan Stanley analyst Keith Weiss thinks Shopify (NYSE: SHOP) could grow sales by 693% during the same period.
Snowflake posted solid financial results in the third quarter, beating expectations on the top and bottom lines. Its customer base expanded 24% to 8,907, and its average established customer spent 35% more with the company during the past year than it had in the year before. In turn, third-quarter revenue rose 32% year over year to $734 million and non-GAAP net income doubled to $90 million. Investors can expect similar momentum in the future.
Snowflake sits at the intersection of two secular trends: data modernization and artificial intelligence (AI). Many businesses look to boost productivity by unlocking the value in disconnected data sets, and that often entails building AI applications. Snowflake has the tools that businesses need to execute on those objectives.
The Snowflake Data Cloud unifies several workloads that have traditionally required multiple-point products. It provides data engineering tools for ingestion, it functions as a data lake for storage, and it serves as a data warehouse for analytics. Additionally, Snowflake’s infrastructure-neutral disposition means those workloads can run across all three major public clouds. That gives its services an edge over the offerings of Amazon, Microsoft, and Alphabet’s Google, none of which offer customers the same flexibility.
Snowflake also facilitates data sharing. That functionality is important for two reasons. First, it creates a network effect that makes the Data Cloud more useful as additional new businesses bring data to the platform. Second, it allows businesses to easily provision data for training machine learning models. To quote CEO Frank Slootman, “Data sharing makes Snowflake uniquely positioned to enable AI workloads.”
All of this helps explain how Snowflake ranked No. 1 on the Fortune Future 50 List for 2023, which the magazine describes as an annual “assessment of the long-term growth prospects of the world’s largest publicly traded companies.” The authors of this year’s article attributed Snowflake’s high placement to its important role in the AI value chain. Simply making the list is impressive, but taking the top spot is a testament to the company’s monster growth potential.
In the same vein, Morningstar’s Bhusal Sharma expects the company to grow its revenue at an annualized rate of 26% over the next decade, implying that sales will be up by 909% in 2033. In that context, its current valuation of 24.8 times sales still looks a bit pricey, but investors comfortable with volatility could open a small position in the stock today. That said, I would personally wait for a pullback before purchasing shares.
Shopify has struggled due to inflationary headwinds, but it continued to regain momentum in the third quarter. Revenue increased by 25% year over year to $1.7 billion, an acceleration from its 22% growth in the prior-year period as the company benefited from an influx of larger merchants, strong adoption of adjacent services, and pricing power. Additionally, Shopify returned to GAAP (generally accepted accounting principles) profitability with net income of $708 million, compared to a loss of $188 million in the prior-year period.
The driving force behind that bottom-line improvement was the divestiture of its logistics business. That decision freed up capital for product development without compromising access to logistics solutions. Specifically, its merchant clients can still provision freight, fulfillment, and shipping services through partners like Amazon and Flexport. In fact, Shopify recently added support for “Buy with Prime,” a program that extends the benefits of Prime membership beyond the Amazon marketplace.
The bull case for Shopify is simple: As the recognized leader in e-commerce software, and the second-largest U.S. e-commerce company by gross merchandise value, it is well positioned to benefit from the continued expansion of online shopping. Straits Research projects that the retail e-commerce market will grow at an annualized rate of 8% through 2030, but Shopify’s growth should easily outpace the industry average, given its strong market position.
Shopify also has growth prospects beyond retail. Management sees a $138 billion opportunity in adjacent merchant solutions such as payment processing services and cross-border commerce tools. It also sees a $473 billion opportunity in offline retail and wholesale e-commerce, a market that is four times bigger than retail e-commerce and growing twice as fast. Finally, it has yet to start charging clients for its sophisticated marketing software, Shopify Audiences.
With all that in mind, Morgan Stanley’s Weiss thinks Shopify could grow its revenue at an annualized rate of 23% over the next decade, implying that sales will be 693% higher by 2033. That makes its current valuation of 14.9 times sales look quite reasonable, especially when its three-year average ratio is 24.3 times sales. Patient investors with time horizons of five years or more should feel comfortable opening a small position in this growth stock today.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Shopify. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Shopify, and Snowflake. The Motley Fool has a disclosure policy.