Snowflake Inc. (NYSE:SNOW), a global cloud-based data platform, has witnessed its shares dropping nearly 22% following the release of its fourth-quarter earnings report. Year-to-date, SNOW stock is down 41.7%.
The narrative blames high inflation and rising interest rates. Unfortunately, Russia’s invasion of Ukraine has shifted investment sentiment to a risk-off mood, which can logically explain the poor stock price performance. There is also another factor to explain the weakness in SNOW stock, and that is Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL).
Why blame Google for what is happening to Snowflake? It is interesting stuff, so I suggest you read on.
Snowflake CFO Attacks Google: But why?
I admit, when I read this article about Snowflake’s chief financial officer (CFO) attacking Google for the weakness in the SNOW stock price, I was surprised. What is the rationale behind it?
The good news is that Snowflake’s CFO “defended enhancements to the software company’s products that are estimated to cost $97 million in lost revenue this year amid a plunge in the share price since the disclosure.” The arguments are that these changes will allow Snowflake to grow. As its services become cheaper, there is a strong incentive for customers to use more of the suite of services offered and that should boost revenue.
On the other hand, queries about the cloud could lead to a lower amount of money users pay to Snowflake.
Which scenario has the most chance of becoming the dominant one? We do not know yet. What we do know is that Snowflake’s CFO said that Google Cloud does not “like to partner very well, especially if they feel threatened.” The truth is that Google sells another rival product called BigQuery.
Still, why the attack on Google when you have severe fundamental problems to deal with within your own company? Here are four major risks that explain why the selloff for SNOW stock is fully justified.
4 Key Problems Snowflake Must Solve
The fourth quarter and full-year fiscal 2022 earnings report showed mixed results. The positive news supports the fact that Snowflake is a growth stock. Product revenue was $359.6 million in the fourth quarter, which showed a 102% year-over-year growth. The firm announced a remaining performance obligation of $2.6 billion, which represents 99% year-over-year growth and a very impressive net revenue retention rate of 178%.
The first problem I notice is a substantial product revenue growth slowdown. For FY2022, the product revenue growth was 106%, which represents a second consecutive year of decline, as in FY2020 and in FY2021 the growth was 173.88% and 123.63%, respectively.
What caused a selloff of 22% upon this earnings release? It was the guidance stating FY2023 product revenue growth will increase 65% to 67%, which if materialized, would be the third consecutive year of a revenue slowdown. This is not an ideal scenario for a high-growth company.
The second risk is that net loss for FY2022 widened to $679.94 million compared to a net loss of $539.1 million in FY2021. Investors should wonder why a significant triple-digit growth in revenue did not lead to a narrower net loss. Or why the operating loss of $715 million widened compared to the operating loss of $543 million in FY2021.
Instead of making progress in profitability, Snowflake reported much worse profitability and wider losses.
The third risk is stock dilution. For the end of the fiscal year on Jan. 31, 2021, Snowflake reported weighted-average shares used in computing net loss per share attributable to common stockholders — basic and diluted of 141,613,196 that grew to 300,273,227 on Jan. 31, 2022, an increase of nearly 113%. That is a massive stock dilution.
Lastly, the fourth risk is elevated valuation. SNOW stock is relatively overvalued based on its price-to-book Ratio of 11.7x compared to the rest of the U.S. Information Technology industry average of 3.9x. The price-to-sales ratio of 67.94 is also high. The price-to-sales (FWD) ratio of 29.25 is 840% higher than the Information Technology sector median of 3.11.
Snowflake now has a business that is strong in terms of revenue, but a slowdown is already present in revenue growth. Additionally, the valuation remains too high and the profitability seems to be getting worse. The very high stock dilution makes the case for being bearish on SNOW stock even stronger.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.