Snowflake (SNOW -1.99%) has served its early investors well. Warren Buffett's Berkshire Hathaway invested in this stock before the IPO at a significantly discounted price. When Snowflake ultimately debuted for retail investors, it was priced at more than double the $120 per share IPO price.
Consequently, the stock for this tech company has underperformed the S&P 500 total return since that time, mirroring the performance of many stocks in the sector hit by macroeconomic changes in 2021 that were out of their control. With tech growth stocks dropping significantly over the previous year, some analysts now wonder if Snowflake can stage a comeback in 2022. Let's explore this idea more.
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Snowflake's competitive advantage
Snowflake has become one of the more prominent players in the data cloud. Previously, entities had often stored data in separate silos accessible to few and frequently copied in multiple places. This leads to data being updated for one source but not the other, a situation that can easily lead to questions about whether specific data sources stayed accurate over time.
The data cloud solves this problem by creating a centralized repository for data that can limit access and change user permissions without compromising security or accuracy. Though Amazon (AMZN -2.56%), Microsoft (MSFT -1.27%), and Alphabet (GOOGL -1.23%) (GOOG -1.10%) can run data clouds, Snowflake holds the advantage of offering interoperability across cloud providers. As of the third quarter, about 5,400 customers run 1.3 billion queries daily on its platform.
The state of Snowflake stock
Despite its compelling product, Snowflake has frustrated investors since its September 2020 IPO. Its price-to-sales (P/S) ratio, which currently stands at 83, has never fallen below 68 since that time. In comparison, Microsoft sells for 13 times sales, and both Amazon and Alphabet support single-digit sales multiples. Such a difference could cause investors to question whether Snowflake is a good buy in 2022.
More importantly, its high multiple works against the stock as investors continue to dump most tech growth stocks. Due to the recent sell-off, Snowflake stock sells for 1% less than its closing price one year ago. Moreover, investors who bought on the IPO day have seen a gain of only 13% over the last 16 months, well under the 38% gain for the S&P 500.
Can company growth drive it higher?
Considering the revenue growth numbers, one can understand the willingness to pay a substantial premium. The $836 million in revenue earned in the first nine months of fiscal 2022 surged 108% compared with the first three quarters of fiscal 2021.
However, the future appears to point to slowing growth. Snowflake estimates about $1.13 billion in revenue for fiscal 2022. This would amount to a year-over-year increase of 104%. Consensus estimates point to $2.01 billion in revenue in fiscal 2023, implying a 78% revenue increase. Though that's still massive, the slowdown could cause investors to question whether Snowflake stock is worth its 83 P/S ratio, placing further pressure on the stock.
Nonetheless, Grand View Research forecasts a 19% compound annual growth rate for the global cloud computing industry, taking its size to more than $1.25 trillion by 2028. This indicates that the company may have barely scratched the surface of its potential.
Snowflake stock in one year
With its competitive advantage, Snowflake appears poised to become the data cloud company of choice for potential customers. Nonetheless, both the current valuation and the market's overall direction cast doubt on its ability to drive returns in the near term. Even if it continues to perform, 83 times sales likely prices Snowflake for perfection. Moreover, the drop in many growth tech stocks has sapped investor optimism, making further sell-offs in the stock more likely. Although a falling stock price could eventually make Snowflake stock attractive to investors, it appears unlikely to serve investors well over the next year.
