Cloud data management and analytics company Snowflake (NYSE:SNOW) is down over 36% year-to-date on concerns over its growth rate and lack of profitability.
With such a sharp downturn in a year when tech giants have driven the S&P 500 overall up by nearly 14%, there’s at least a chance that the market has been too aggressive in selling Snowflake.
Is now the time to buy SNOW, or will the stock continue to burden its investors with negative returns?
Net Losses Continue as Revenue Growth Slows
Snowflake’s lingering problem is a combination of ongoing steep losses and a slowdown in revenue growth.
The company most closely approached profitability in 2020, when its trailing 12-month losses amounted to about $540 million. Today, that number has ballooned to $836 million.
Yearly revenue growth, meanwhile, has fallen from over 100% as recently as early 2022 to just 33% as of the Q1 earnings report.
This has left Snowflake in a somewhat difficult position where investors are concerned. Even though the current growth rates are excellent for most businesses, Snowflake had been priced at levels that required even higher growth to justify its pricing.
Looking forward, revenue expansion is expected to further slow. For the current fiscal year, management expects product revenue to grow by 24%.
Another issue Snowflake faces is the fact that management has slowly but surely diluted the stock. Though the rate at which the base of outstanding shares is expanded has fallen into the low single digits, the number of SNOW shares has gradually crept up from 284 million in early 2021 to 328 million today.
If management sustains this pace of dilution, it will make it even more difficult for already embattled investors to earn returns on their existing holdings.
Snowflake Still Looks Expensive
Valuation multiples still appear high for Snowflake. The stock currently trades at 15.2x sales, putting it closely on par with the likes of Microsoft which trades at 15.5x sales.
The difference, of course, is that Microsoft’s net margin is 36.4% and it has been profitable for multiple decades.
Though far below the price-to-sales ratios of up to 100 that the company commanded in past years, this is still quite a high multiple for a business that’s still losing as much money as Snowflake is.
But There Are Still Bright Spots
Even with some fairly strong headwinds, Snowflake still has a number of bright spots.
To begin with, revenue growth may be set to rebound as the company continues to meet its outstanding obligations. As of Q1 reporting, Snowflake still had $5.0 billion in performance obligations according to management. This is 46% higher than the year prior.
If the company can continue to move through its project pipeline fairly quickly, it’s likely that it can sustain or even improve its current rate of revenue growth.
Snowflake still has a reasonably strong moat thanks to its widespread use among large enterprises. As of the Q1 report, about 35% of the Forbes Global 2000 were Snowflake customers.
The company’s market share in data warehousing is also over 20%, a fact that could make it difficult for new competitors to come in and disrupt Snowflake’s business.
About 485 of the company’s customers contribute $1 million or more annually to its total sales, a number that only continues to grow.
As with most large technology firms, Snowflake is currently exploring the potential benefits of AI for its business. Chief among its AI projects is Snowflake Cortex, a service that will provide the company’s customers with access to large language models (LLMs) for faster and more refined data querying.
Management expects the investments in AI to begin showing up in fiscal results in 2026 and beyond, promising a potential long-term growth catalyst that has real potential to bolster shareholder returns over multiple years.
Finally, Snowflake’s financial position remains very solid. Even with the losses it has racked up over the years, the company has no appreciable debt and a massive cash stockpile.
Between cash, cash equivalents and short-term investments, Snowflake is sitting on more than $3.5 billion, allowing it to operate at its current level of losses for at least a few more years, by which time enhanced scale could help it to move towards profitability.
Is It a Good Time to Buy Snowflake Stock?
Even with the company’s steep losses and valuation, most analysts believe it is a good time to buy Snowflake stock. More than two-thirds of the 48 analysts covering the stock rate it as a buy.
The median target price of $200 per share for the coming 12 months would imply gains of more than 55% from the most recent price level.
Institutional ownership remains above 65% and purchases by institutional investors have outpaced selling in each of the last four quarters, suggesting that Wall Street still sees long-term value in the stock.
This view is backed up by more than just optimism. The company’s financial standing, continued streak of double-digit revenue growth and strong competitive position all support the idea that Snowflake could become an extremely valuable company one day.
The landscape also looks quite bright for the company, as large businesses will almost certainly continue to invest in cloud computing, data management and AI capabilities over the next several years.
Despite its promising attributes, Snowflake is likely still a stock fraught with volatility. The company’s continued losses are a red flag for value investors, especially without a clear path to profitability on the immediate horizon.
With that said, there’s a good argument to be made that the stock may be oversold. SNOW shares certainly have the potential to rebound as future revenue growth helps the company to improve its margins, and payoffs from AI investment are set to help it sustain high growth rates for many years to come.
Conservative investors can likely find more stable and dependable stocks elsewhere, particularly among the large, profitable software firms.
More risk-tolerant investors, though, may find SNOW’s upside potential appealing. Though it’s a fairly volatile stock to own, investors who are comfortable waiting for their returns and riding out ups and downs may find it worthwhile to open small positions in Snowflake at current prices.
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