Snowflake Could Have a Lot Further to Fall

  • Bulls see the growth narrative in Snowflake (SNOW) as a rare find.
  • But a challenging macro environment and valuation are riskier propositions in SNOW stock.
  • Staying on the sidelines is a sound tactical decision for Snowflake bulls.
Snowflake symbol and logo at the company corporate headquarters in Silicon Valley. SNOW stock.

Source: Sundry Photography / Shutterstock

Upbeat economic data and a couple weeks of stiff selling pressure are enabling some broad-based bargain hunting. And the bid is no doubt helping growth play Snowflake (NYSE:SNOW) to a solid gain in Tuesday’s session.

Wall Street is finally in a more lively mood after housing starts and permits data rose unexpectedly. That’s easing worries that the housing market is cooling off. For its part, the large-capitalization, tech-heavy Nasdaq is up 2% and trying to establish a floor off the 62% retracement level tied to its mid-March bear market low.

Toss in more significant damage to rate-sensitive growth stocks over the past two weeks and Tuesday’s bullish call to arms hasn’t been lost on software-as-a-service (SaaS) stock Snowflake. Shares were up as much as double the Nasdaq — 4% at one point.

But is today’s reaction in Snowflake shares worth chasing? Let’s review what else is happening in SNOW stock and what, if any, course of action investors might consider going forward.

SNOW Snowflake $196.68

Unlike a Snowflake, SNOW Stock Isn’t That Unique

The bull thesis in Snowflake is grounded in ever-present expected growth due to the differentiating products that the cloud provider brings to the table. SNOW is the next Microsoft (NASDAQ:MSFT), right??

To walk the aisle, there’s no doubt that  SNOW’s offerings have proven very popular with clients in need of data cloud products. Revenues have been incredibly strong, growing 101.50% year-over-year. And as InvestorPlace’s Dave Moadel expresses, this sales double supports the bulls following SNOW’s stock correction.

But while he doesn’t say it, Snowflake also embodies the “this time is different” defense. And with very rare exceptions, the cheerleading generally doesn’t live up to the billing. Worse and in SNOW’s case it’s risky business for investors.

Despite being 50% removed from its 52-week high, shares of SNOW still sport an exceptional and risky combination of a $62 billion market cap, price-to-earnings (PEG) ratio of 7.5 and a price-sales ratio of 49 times!

And profits? Oh yeah, don’t worry. They’re coming … somewhere down the road, in a higher-rate environment.

Also alarming, analysts are going hard on backing SNOW stock. The median price of $313 a share according to TipRanks is roughly 60% above Snowflake’s current market price.

Lastly, I’ll end this by reminding SNOW stock bulls that it took MSFT stock nearly 16 years to hit new highs after collapsing during the dot-com bubble.

Use Caution in SNOW Stock

Snowflake (SNOW) downward-sloping lifetime channel sets up for a second test and greater potential for failure
Source: Charts by TradingView

SNOW stock’s price chart is throwing a cautionary warning to would-be buyers.

Snowflake is known for producing volatile price swings, with the total of those wild ups and downs establishing a lifetime, modestly downward-sloping channel. That could be bearish, but more troubling is that after staging a March rally off channel and Fibonacci-based two-step support (AB = CD on the chart), shares have been turned back at key resistance.

Comprised of the channel mid-line, a downtrend within the larger consolidation, the 38% retracement level and a doji battleground on the monthly timeframe, SNOW’s failure to clear the area from about $245 – $265 (plus a neutral-territory bearish stochastics crossover) is a sure warning to buyers.

At a minimum, a second challenge of support near $150 – $155 is anticipated. Worse, a pattern failure could easily send shares aggressively lower. I’d warn SNOW stock could see $75 – $100 as a first wider downside target and even $50 a share if a prolonged bear market in the U.S. stock market were to take hold.

Snowflake Stock Takeaway

Net-net, SNOW stock is at risk of a larger correction. That outcome appears more likely in a rising-interest-rate environment where, among other things, the present value of future earnings is worth less.

That said, I believe an unhedged stock purchase is best put on hold.

If today’s broader de-risking trade were to somehow fall to the wayside, Snowflake shares will still need to retract a bearish stochastics signal and clear the $270 – $290 area before they have technical room to move towards $400 and a breakout to new highs.

Admittedly, the spread between today’s $200 price tag in SNOW stock and that $270-$290 resistance area is a lot to leave on the table before making your decision, even in Snowflake. In fact, it works out to 40% mid-market!

An alternative buying strategy for more risk-tolerant investors given that sizable difference between the SNOW stock price and resistance is buying on weakness confirmed by a weekly candlestick reversal pattern and stochastics. More importantly, continue to be mindful that if SNOW’s technical-based investment turns south, as a much larger multiple compression at the hands of a risky valuation isn’t to dismissed.

On the date of publication, Chris Tyler 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.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2022/04/snowflake-could-have-a-lot-further-to-fall/.

©2022 InvestorPlace Media, LLC