- Shares of Snowflake (SNOW) look to have bottomed on March 14. Will the recent upturn hold?
- The company’s revenue increased 106% in its most recent fiscal year, impressing Wall Street
- Snowflake’s lack of profits and a price-to-sales ratio of 54 continue to weigh on the share price
Down nearly 40% year to date, can things get much worse for cloud computing company Snowflake (NYSE:SNOW)?
To be fair, SNOW stock has rebounded since mid-March. After hitting a trough of $166.75 a share on March 14, Snowflake’s share price has rallied 25% to now trade at just under $215. However, the stock remains 48% lower than the $405 a share it was changing hands at last November before the current route in technology securities began.
The question for investors is whether the bounce in Snowflake stock is legitimate and likely to continue, or if the company’s share price will again turn south and decline further in coming months. As with most tech stocks, volatility continues to be the norm for Snowflake and its beleaguered shareholders.
| SNOW | Snowflake | $214.41 |
Stellar Financial Results
Snowflake has been a publicly traded company for less than two years. The company’s initial public offering (IPO) in September 2020 was the biggest ever by a software company. It attracted some marquee interest, with legendary investor Warren Buffett getting in on the company’s market debut and purchasing more than six million shares of SNOW stock. (And Buffett almost never gets in on an IPO, especially one by a technology company).
However, Snowflake has distinguished itself from other tech companies that have come to market in the past few years with big promises and little else. In contrast, Snowflake has delivered stellar financial results.
For its fiscal year ended on Jan. 31 of this year, Snowflake reported $1.1 billion in revenue, which was 106% more than the previous year. The company also reported that it has $2.6 billion already booked in contracted future revenue, which puts investors’ minds at ease.
If there’s a knock on Snowflake, it is that the company is not yet profitable. For fiscal 2022, Snowflake reported a net loss of $680 million, roughly $140 million larger than the previous fiscal year . The company guided for revenue this year of $1.8 billion to $1.9 billion, representing 66% year-over-year growth.
Snowflake now has nearly 6,000 paying customers, up more than 40% from a year earlier. Perhaps more important, Snowflake has 184 customers paying at least $1 million a year, which is more than double the 77 such customers it had at the end of its last fiscal year. By most measures, Snowflake is firing on all cylinders.
Pricey and No Profits
While many on Wall Street dismiss Snowflake over its lack of profitability, other take issue with the company’s valuation. While Snowflake’s valuation has come down nearly 30% so far in 2022, the stock still trades at a price-to-sales ratio of 51. That’s high when compared to a competitor such as Palantir (NYSE:PLTR) that trades at 16 times sales.
When looking at the red ink and high valuation, it becomes easy to see why investors have been selling out of SNOW stock in recent months. To a large extent, Snowflake’s shares have been pulled down along with other high valued, unprofitable tech stocks.
While Snowflake is growing at a remarkable rate, the company does face a rising number of competitive threats from the likes of Amazon (NASDAQ:AMZN) Web Services’, Alphabet’s (NASDAQ:GOOGL) Google Cloud, and Microsoft’s (NASDAQ:MSFT) Azure.
Plus, the outlook for stocks remains uncertain at best, especially for tech stocks that have to contend with rising interest rates and a potential recession in the U.S., as well as war in Europe and continued supply chain issues abroad.
With a market capitalization of about $67 billion, Snowflake is firmly in the camp of large-cap growth stocks that, unfortunately, seem to be out of favor with investors right now.
The Bottom Line
There are definitely worse tech stocks investors can buy than Snowflake. The Bozeman, Montana-based company has great cloud computing technology, a rapidly expanding customer base, and revenue that’s growing at an exponential rate.
That said, Snowflake remains unprofitable and is saddled with a high valuation, both of which are viewed as negatives in the current market that remains volatile and is struggling to find its footing.
For these reasons, it would be best for investors to wait for market conditions to improve before taking a position in Snowflake. The company is on the right path, but, at this point in time, SNOW stock is not a buy.
On the date of publication, Joel Baglole held long positions in GOOGL and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
