I remain very upbeat on Snowflake’s (NYSE:SNOW) fundamentals and the long-term outlook of SNOW stock. And obviously, after sinking well over 50% from their all-time high of $429 and tumbling 36% in the last three months, the shares now have a much more attractive valuation.
However, given investors’ current mood towards growth and technology stocks, as well as the company’s impending earnings report on May 26, I continue to advise investors to avoid the shares.
Snowflake’s Fundamentals Remain Strong
In a column on Snowflake published on Oct. 5, I wrote that SNOW stock ” has all the elements needed to become a huge winner over the longer term. Specifically, the company operates in a hot sector, appears to have great technology that will tremendously help its customers, and has a wonderful CEO.”
In the wake of the company’s very strong Q4 results, I continue to believe that those statements are correct.
Snowflake’s product revenue surged 116% year-over-year, and it obtained $1 million or more from 77 of its customers over the 12 months that ended in March. In Q1, it expects its product sales to nearly double. Further, the firm’s net cash provided by operating activities came in at $19.6 million and its free cash flow, excluding certain items, was $17.3 million.
Two prestigious research firms were upbeat on Snowflake’s Q4 results and its guidance in separate notes to investors. Deutsche Bank’s Patrick Colville wrote that “4Q numbers support our thesis that Snowflake is in the sweet spot for two key secular trends of this decade: data-driven decision-making and cloud adoption.”
Meanwhile, research by UBS‘ Karl Keirstead indicated that “spending growth on data analytics software technology” by the clients of large cloud infrastructure providers is likely to be material over the coming years.” Additionally, Keristead’s conversations with Snowflake’s customers indicated that the company is positioned well.
Snowflake’s Valuation Is High
Despite the huge drops of SNOW stock, the shares are still trading for over 50x analysts’ average 2021 sales estimate for the company, according to Yahoo Finance. That’s a very high valuation. Moreover, the shares are still trading far above their IPO price of $120. (The company’s IPO took place in September).
Moreover, as I’ve stated previously, the market is not positively disposed towards growth stocks with high valuations at this point. One such stock, Fastly (NYSE:FSLY), tumbled tremendously recently after it reported Q1 sales that surged 35% and were in line with analysts’ average outlook. But its loss per share came in 1 cent above the mean estimate and its Q2 guidance was well below the average view. It’s also worth noting, however, that the company’ announced that its CFO was leaving.
Although Snowflake’s CFO probably won’t depart, the company’s Q2 guidance could also come in below analysts’ average estimate. I think it’s possible that, like Fastly, Snowflake could be meaningfully, negatively impacted by the continued reopening of the economy. After all, with the work-from-home trend weakening, companies may not have as much need to keep and analyze data in the cloud now as they did at the beginning of the year.
The Bottom Line on SNOW Stock
Like Jack Andrews, an analyst at Needham, I believe that Snowflake’s fundamentals and growth outlook are strong. Also like him, however, I think that “Snowflake’s current valuation accounts for an already-optimistic scenario and fairly incorporates numerous investment positives.” The comments by Andrews, who initiated Snowflake with a “hold” call on May 2, were reported by Barron’s.
Further, the combination of a guidance shortfall and the market’s nervous mood could result in SNOW stock tumbling in the wake of its upcoming earnings. As a result, I advise investors to buy the name on weakness sometime after it reports its results.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
