Data storage and analytics major Snowflake (NYSE:SNOW) has been on a bumpy ride in recent months. Year-to-date, the company has lost 20.5% of its value as investors soured on its future growth prospects.
The resulting selloff may, however, have left Snowflake oversold and set the stage for a rebound in share prices. What does the future hold for Snowflake, and is this one-time tech darling worth buying while prices are low?
Revenue Growth Is Slowing & Losses Steep
Snowflake’s recent selloff is a direct result of what appears to be weakening growth fundamentals.
Chief among the company’s issues is its revenue growth rate, which slowed to 33% year-over-year in Q4. Though far from insignificant, this rate of revenue growth pales in comparison to what the company was achieving in 2021 and 2022. As recently as Q1 of 2023, revenues were growing at rates in excess of 50% year-over-year.
Alongside slower revenue growth, Snowflake is still reporting large net losses, leaving it without a clear path to profitability.
Over the last year, Snowflake lost $836.1 million. Net margin over this period was -29.8%, While this net margin rate does represent an improvement over prior years, Snowflake is clearly still far from reaching its breakeven point.
Key Performance Metrics Are Still Positive
Despite Snowflake’s growth slowdown, the company is still performing well in several areas. To begin with, its net revenue retention rate is 131%.
Even though net profits remain elusive, Snowflake reports a 74% gross profit margin on its products, a fact that may demonstrate the potential for long-term profitability as Snowflake continues to scale up.
Snowflake also continues to attract large, valuable customers. In its Q4 report, the company detailed a 39% increase in customers contributing $1 million or more to its annual revenues.
Snowflake is also used by more than 30% of Forbes Global 2,000 customers, a fact that will likely give the company a strong, predictable revenue base going forward.
A final point of note regarding Snowflake’s fundamentals is its strong financial position. In addition to carrying no long-term debt, the company has been able to significantly increase its overall assets over the past year.
At the end of Q4, Snowflake reported total assets of $8.22 billion, up from $7.72 billion in the year-ago period. This included an increase of cash and cash equivalents from $939.9 million to $1.76 billion. As such, there is little reason to believe that Snowflake will face near-term financial difficulties.
Where Will Snowflake Stock Be In 1 Year?
According to analysts, Snowflake stock can rise by as much as 32.1% to $206.23 per share over the next year.
If this price prediction proves to be accurate, Snowflake has the potential to return about four times the S&P 500’s 8% expected return.
It’s also worth noting that several analysts have recently upgraded Snowflake, a fact that lends credence to the idea that the stock is oversold and reached a natural low.
Barring further headwinds, it’s likely that SNOW will pare back its recent losses and gradually advance throughout the remainder of 2024.
Snowflake’s Competitive Threats Are High
Beyond ongoing losses, Snowflake also faces competitive challenges.
While its platform offers the advantages of scale, a fact that likely contributes to its widespread use among enterprise-scale customers, it tends to cost more than competitive software solutions and lacks the ability to handle unstructured data.
These disadvantages could leave Snowflake vulnerable to competitive pressures, especially as companies navigating rising input costs seek out better values for their IT budgets.
In addition to the existing competitive actors in the data analytics industry, Snowflake may rapidly find itself in a difficult position if a large company like Microsoft or Amazon created products to compete with the company directly.
As two of the largest cloud companies, these actors could easily outspend the young enterprise and rapidly produce equivalent products in-house, thus depriving the company of future growth opportunities.
Another risk Snowflake must deal with is that of cybersecurity. As a major data service provider, Snowflake’s reputation is at risk of being tarnished if data on its platform were to be compromised by malicious hackers. In an era of ubiquitous cybersecurity threats, Snowflake will have to remain vigilant to avoid costly breaches.
The Bottom Line
With revenues still growing and net margins improving, Snowflake fundamentals continues to move in the right direction.
Although this process isn’t happening as quickly as investors may have initially anticipated, Snowflake’s performance will likely continue to improve over the coming months.
In conjunction with expected interest rate cuts that favor high-growth stocks, the conditions appear to be present for at least a moderate rebound in SNOW shares.
It’s also probable that Snowflake will receive a tailwind boost from continued investment in AI tools. The company has introduced several tools that support AI app development within its ecosystem, potentially setting the stage for it to remain at the cutting edge of business data needs. This fact will likely help the company retain its current base of large customers and attract new ones.
On the downside, Snowflake still trades at a premium price at a time when slower growth is on the horizon. Even after the recent selloff, SNOW shares trade at over 18.5x trailing 12-month sales and 9.3x book value.
Management’s Q1 guidance suggests product revenue growth of 26-27%, representing a continuation of the trend of lower revenue growth. As such, the stock still doesn’t appear to have become particularly attractive from a value perspective.
Overall, it appears likely that Snowflake will claw back some of its recent losses over the coming 12 months, though the high percentage gain forecast by analysts seems to represent a best-case scenario.
Investors may more realistically and conservatively expect gains of about half that level, taking Snowflake back toward the prices with which it began 2024. In light of the company’s slower growth and risks, though, Snowflake is likely a better hold than a buy at today’s prices.
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