What happened
Shares of hypergrowth cloud data platform Snowflake (SNOW -1.00%) were falling today, down as much as 7.4% in early-morning trading, before recovering slightly to a loss of 4.9% as of 12:56 p.m. ET.
The sell-off doesn't appear to have anything to do with the company's operational results or news; in fact, shares soared last week after Snowflake's better-than-feared second-quarter earnings report.
However, that may be the reason for the fall today. Investors may be selling recent winners from this earnings season and buying other stocks that plunged last week on the heels of the Federal Reserve chair's hawkish comments. In addition, this morning saw a rise in long-term interest rates, which disproportionately hurts no-profit, high-growth stocks like Snowflake.
So what
Last week, Snowflake shares climbed more than 20% following a better-than-expected earnings report. Specifically, Snowflake's revenue surged 83% to $497 million in the second quarter, trouncing analyst expectations, and management raised full-year guidance.
Snowflake's great week defied the negative trend in the markets, which had a terrible week. The tech-heavy Nasdaq Composite fell nearly 4% on Friday alone, following comments from Fed Chair Jay Powell at Jackson Hole suggesting the need for higher interest rates. Investors might be taking profits from Snowflake today in order to raise cash or buy other stocks that fell hard last week. This seems plausible, as there wasn't any company-specific news today.
While Snowflake's revenue growth is just about the best you will find in the tech sector, the stock is one of the most highly valued, trading at 37 times sales. The company is also faced with continued operating losses as it invests in growth.
Rising long-term interest rates tend to have a negative effect on stocks like Snowflake. Both oil prices and the 10-year Treasury Bond yield were up today, with the 10-year yield rising from 3.035% to 3.12%. When long-term interest rates rise, investors might increase the rate they use to discount future earnings of stocks, demanding a lower price today for the same future cash flows. That's why rising long-term rates hit high-growth stocks especially hard, and Snowflake is the poster child for high-growths stocks.
Given likely profit-taking and the rise in long-term rates, it's no wonder Snowflake is falling more than the market today.
Now what
Snowflake remains one of the most exciting stocks in the market, as evidenced by its huge growth rate. Keep in mind, the data cloud company also has a differentiated business model that charges customers based on usage, not a fixed annual subscription.
That could be why Snowflake vastly outperformed other software-as-a-service peers this earnings season, many of which reported a slowdown in new deals. Committing to a year or more of a fixed subscription may seem like a taller order these days than paying based on usage, which customers can control. Therefore, Snowflake's model could turn into an advantage in times when caution is needed, as could the model for usage-based cloud infrastructure companies.
Still, Snowflake investors will likely be battered by volatility, as they wrestle with Snowflake's operational outperformance combined with a sky-high valuation. In an age of higher inflation and rising interest rates, there may be a limit to how much Snowflake can go from here, no matter how well the business does.
However, should inflation go down markedly and interest rates return to their lower pre-pandemic levels, the stock could go up again. Still, investors should be prepared for big moves in both directions in this uncertain macroeconomic climate.
