What happened
Shares of Snowflake (SNOW 2.69%) were up 7.2% today as of market close. It was a relief rally for the cloud computing company and other high-growth but richly valued stocks, which have taken hit after hit this year from ongoing pandemic worries (most recently the omicron variant) and higher interest rates in 2022 (higher rates lower the value of future profits, which lowers present stock value).
However, though Snowflake is now down some 22% from its all-time high reached in mid-November, the stock is up 26% in 2021 with just a week and a half until the new year, outpacing the S&P 500's 24% return.
Image source: Getty Images.
So what
If you're a shareholder, expect plenty more volatility from this fast-growing data cloud provider. Though it's growing at an incredible rate (108% total revenue growth through the first nine months of the current fiscal year), Snowflake still trades for 102 times trailing-12-month sales and 54 times next year's expected sales.
The company did swing to free cash flow positive this year, but generating profitability is not the name of the game at this juncture. Given the slim bottom line, many investors simply won't be comfortable owning Snowflake, and even small changes in the company's long-term trajectory can therefore lead to much bigger swings in share price.
Now what
For all the talk on valuation, though, Snowflake's leadership in an important segment of the cloud computing industry is undeniable. Management has issued some ambitious goals, albeit very long-term ones that will require patience. It thinks it can reach $10 billion in annual revenue by 2029 -- representing a fantastic compound annual growth rate of over 30% in the coming eight years. That's certainly not an unachievable target given how large and how quickly the cloud is growing.
If you decide to buy the dip now, just remember to keep the very long-term potential for this business in focus, and be ready to buy more when further inevitable turbulence hits.
