Snowflake (SNOW 0.23%) went public on Sept. 16, 2020. The cloud-based data warehousing company priced its IPO at $120, well above its original range of $75 to $85, and it started trading at $245 a share.

Snowflake attracted so much attention for two reasons: Its growth and retention rates were high, and it was backed by big investors like Salesforce and Warren Buffett's Berkshire Hathaway. As a result, it raised more than $3 billion in its market debut and made history as the largest software IPO ever.

A circuit shaped like a snowlfake.

Image source: Getty Images.

Snowflake's stock continued to rally throughout most of 2021 before closing at an all-time high of $401.89 last November. But over the past six months, Snowflake's stock tumbled back to the low $140s as rising rates drove investors away from the market's more speculative growth stocks.

Therefore, a $1,000 investment in Snowflake's IPO shares would only be worth about $1,200 today. A $1,000 investment in its opening trade would be worth less than $600. Let's see why Snowflake has nearly taken a round trip back to its IPO price, and if its stock will recover later this year.

Why did investors fall in love with Snowflake?

Snowflake unifies all of an organization's data onto a centralized cloud-based data warehousing platform, where it can be more easily accessed by third-party apps and data visualization services.

By pulling all that data from a wide range of different computing platforms, Snowflake breaks down silos and makes sure everyone is on the same page. That streamlined process saves a lot of time and enables an organization to make better data-driven decisions.

Snowflake's approach has impressed a lot of large customers. In fiscal 2021, which ended last January, its total number of customers jumped 73% to 4,139, including 186 of the Fortune 500. Its revenue surged 124% to $592 million, while its net revenue retention rate exceeded 165%.

In fiscal 2022, its number of customers increased 44% to 5,944 as its total revenue surged 106% to $1.22 billion. Its net revenue retention rate climbed to 178% as its largest customers utilized more of its services.

Snowflake expects its product revenue, which accounted for 94% of its top line last year, to grow 65%-67% to $1.8-$1.9 billion in fiscal 2023. It expects that figure to rise to $10 billion by fiscal 2029, which would represent a compound annual growth rate (CAGR) of 36.4% over the next seven years.

It expects to achieve that ambitious goal by increasing its number of large customers, which generate more than $1 million in annual product revenue, from 184 in fiscal 2022 to about 1,400 in fiscal 2029.

Why did investors fall out of love with Snowflake?

Snowflake is growing like a weed, but its long-term guidance implies its growth will gradually cool off. During last quarter's conference call, Snowflake CFO Mike Scarpelli also predicted its net revenue retention rate would likely "drop below 170%" in fiscal 2023 as its largest customers slowed down their spending. On the bright side, Scarpelli predicted that rate would still stay "above 150% for quite some time."

Snowflake's growth rates are still impressive, but they're failing to support its nosebleed valuations. Its IPO price of $120 already valued the company at $33 billion, or 27 times its fiscal 2022 sales. Its initial trading price of $245 valued it at nearly $70 billion, or 57 times its fiscal 2022 sales.

At its all-time high last November, Snowflake was valued at $123 billion, a whopping 61 times its projected sales for fiscal 2023. Those high price-to-sales ratios made it an easy target for short-sellers as interest rates rose.

Snowflake's lack of profits also made it unappealing as investors rotated toward safer stocks. Its net loss widened from $349 million in fiscal 2020 to $539 million in fiscal 2021, then widened again to $680 million in fiscal 2022. Analysts expect it to post another net loss of $687 million in fiscal 2023.

To make matters worse, Snowflake's success has prompted Microsoft's (MSFT -0.15%) Azure and Amazon (AMZN -0.27%) Web Services (AWS) to upgrade their own integrated data warehousing services. That competitive pressure -- which is ironic because Snowflake actually runs on top of Azure, AWS, and other cloud infrastructure services -- could make it even more difficult for the company to narrow its losses.

Should investors buy Snowflake after its steep pullback?

I admire Snowflake as a company, but its stock is still too hot to handle at 22 times this year's sales. By comparison. SentinelOne (S -1.42%) -- the AI-powered cybersecurity company that is expected to generate 82% sales growth this year -- trades at 19 times that forecast. Plenty of other high-growth tech stocks are also trading at single-digit price-to-sales ratios.

Simply put, I don't think it's the right time to buy Snowflake yet. This stock could be worth revisiting if it drops significantly below its IPO price, but I believe investors should stick with cheaper stocks in this tough market.