Snowflake Stock Down 54% From Record High but Has Promising Future

Snowflake Inc Stands Out Among Tech Stocks

The second-quarter earnings season was relatively strong for the S&P 500 and technology stocks. Some companies delivered fantastic beats, while others drew the ire of investors with soft financial results.

A standout among technology stocks was cloud enterprise data play Snowflake Inc (NYSE:SNOW). So good were the company’s second-quarter results and guidance that the investors rewarded SNOW stock with a 31% gain over five days.

Moreover, Snowflake stock rallied by nearly 50% since declining to a low of $110.26 in June. The bounce was impressive, but shares of Snowflake Inc remain about 54% down from their inflated record high of $405.00, which was set in November 2021.

Chart courtesy of StockCharts.com

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Snowflake Inc Delivers Impressive Second-Quarter Financials

Since its fiscal year 2020 (which ended January 31, 2020), Snowflake Inc has generated triple-digit revenue growth each year, including breaking above the billion-dollar threshold in fiscal 2022.

Fiscal YearRevenues Growth
2019$96.7 MillionN/A
2020$264.8 Million173.9%
2021$592.1 Million123.6%
2022$1.2 Billion106.0%

(Source: “Snowflake Inc.” MarketWatch, last accessed September 1, 2022.)

Although the company hit a revenue milestone of $1.2 billion and SNOW stock is down by about 50% from its all-time high, the stock market is still assigning Snowflake Inc a high revenue multiple.

The company has a premium multiple of 59 times its fiscal 2022 revenues and 19.5 times its consensus fiscal 2024 revenue estimate of $3.1 billion. (Source: “Snowflake Inc. (SNOW), “ Yahoo! Finance, last accessed September 1, 2022.)

Snowflake Inc deserves a premium revenue multiple, but this leaves Snowflake stock vulnerable to lower gains. The company’s revenue growth has been slowing over the past two years, and this trend is expected to continue. But that slowing is normal after periods of extraordinary growth.

In its second fiscal quarter, Snowflake Inc grew its revenues by 83% year-over-year to $497.2 million. Its product revenues in the quarter were $466.3 million. The fact that the company’s revenue growth rate has fallen below 100% is indicative of normalization. (Source: “Snowflake Reports Financial Results for the Second Quarter Fiscal 2023,” Snowflake Inc, August 24, 2022.)

Nonetheless, the company’s forward growth is still impressive, so it deserves a premium multiple.

In its second-quarter report, Snowflake Inc provided high revenue guidance for both the third quarter and full year of fiscal 2023. For the third quarter, management expects product revenues of $500.0 to $505.0 million, for growth of 60% to 62%. For full-year fiscal 2023, management expects product revenues of $1.91 billion to $1.92 billion, for growth of 67% to 68%.

The estimated revenue growth rates are lower than those of the second fiscal quarter and previous fiscal years.

Again, it’s nothing to worry about as Snowflake Inc’s revenue growth normalizes. As long as the growth rate continues in the high double-digits, SNOW stock will attract a higher revenue multiple than its peer group.

Analyst Take

While the recent bounce in the share price of Snowflake Inc was welcome, I wouldn’t be surprised to see a pullback, given the speed of the advance.

I doubt Snowflake stock will fall back to its low, but a move below $180.00 to the 50-day moving average of $155.40 and then toward the range of $140.00 to $150.00 would be an attractive entry point. SNOW stock is a high beta stock that should probably be accumulated in tranches rather than in one fell swoop.