Apple and Microsoft are two of the most widely held stocks in the world, and Wall Street is generally bullish on both companies. Apple has a median price target of $200 per share which implies a 15% upside from its current price, and Microsoft has a median price target of $400 per share which implies a 26% upside from its current price.
But Wall Street sees more upside in two artificial intelligence growth stocks. Cloudflare (NYSE: NET) has a median price target of $74 per share which implies a 28% upside, and Snowflake (NYSE: SNOW) has a median price target of $195 per share which implies a 30% upside.
Here's what investors should know about these two growth stocks that Wall Street rates so highly.
Cloudflare provides a range of cloud services that improve the performance and security of corporate applications and infrastructure across public clouds and private data centers. The company also provides computer and storage solutions through its developer platform, enabling customers to build and deploy software and web pages directly on its network.
Performance and scale separate Cloudflare from other vendors. The company has the fastest global cloud platform on the market, and it powers about 20% of the web in some capacity, which provides deep insight into performance issues and security threats across the internet. The data continuously improves its ability to route traffic and protect clients from attack.
Cloudflare looked sharp in the second quarter despite headwinds from the uncertain economic environment. Revenue climbed 32% to $308 million, and non-GAAP net income improved to $0.10 per diluted share, up from breakeven in Q2 2022. Investors have every reason to believe that momentum will continue (or even accelerate) as economic conditions improve.
Cloudflare values its addressable market at $164 billion next year, and the company is a recognized leader in several cloud verticals, including content delivery network software, zero-trust network access, and edge development platforms. The last category is particularly salient because it positions Cloudflare as a preeminent player in artificial intelligence (AI).
Indeed, CEO Matthew Prince says, "By our estimates, Cloudflare is the most commonly used cloud provider across leading AI start-ups." That encouraging news can be attributed to its unparalleled performance and interoperability with every major cloud provider. Prince also believes the company is "uniquely positioned to win the inference market," meaning he believes many organizations will choose to run their AI applications on Cloudflare's infrastructure in the future.
Shares currently trade at 16.9 times sales. That is not a cheap valuation, but it is a bargain to the three-year average of 40.9 times sales and it looks reasonable in context. Management says Cloudflare will achieve a revenue run rate of $5 billion by the third quarter of 2027, implying annual revenue growth of 39% between now and then.
That should make investors feel comfortable buying this stock today. But Cloudflare is best viewed as a long-term investment. There is no guarantee shareholders will see 28% returns anytime soon.
Snowflake helps businesses manage and make sense of big data. Its platform unifies a variety of workloads that have traditionally required a patchwork of products, including data engineering for ingestion, data lakes for storage, and data warehousing for analytics. It also supports the secure sharing of data, which lays the foundation for a potentially powerful network effect and leaves Snowflake "uniquely positioned to enable AI workloads," according to CEO Frank Slootman.
Snowflake clearly distinguished itself from tech giants like Amazon Web Services (AWS) and Microsoft Azure with its cloud-neutral strategy. Its data platform runs across all three major public clouds, so customers are free to work with the cloud vendor(s) of their choosing. The same cannot be said of data warehousing solutions on AWS and Azure.
Snowflake reported solid results in fiscal Q2 of 2024 despite the challenging business environment. Revenue increased 37% to $640 million, and non-GAAP earnings improved to $0.22 per diluted share, up from $0.01 per diluted share in Q2 of the prior year. Management is confident that momentum will continue.
Snowflake sees its addressable market rising from $140 billion in 2022 to $290 billion by 2027 as businesses look to unlock value in big data. Enthusiasm surrounding AI will only intensify demand for data management solutions. Slootman made that very clear during the latestearnings call saying businesses "cannot have an AI strategy without a data strategy." That puts Snowflake in a very good position because its platform has effectively become the center of gravity for enterprise data.
On that note, shares currently trade at 19.5 times sales. Not cheap, but it is the cheapest valuation Snowflake has seen as a public company and it looks reasonable in context. Management expects annual revenue to reach $10 billion by fiscal 2029 (ends Jan. 31, 2029), which implies annual revenue growth of 37% between now and then.
That should give investors confidence in this growth stock. But Snowflake is best viewed as a long-term investment. There is no guarantee shareholders will see 30% returns anytime soon.
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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.com. The Motley Fool has positions in and recommends Amazon.com, Apple, Cloudflare, Microsoft, and Snowflake. The Motley Fool has a disclosure policy.
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