Snowflake (SNOW 1.00%) posted its latest earnings report on Nov. 30. For the third quarter of fiscal 2023, which ended on Oct. 31, the cloud-based data warehousing company's revenue rose 67% year over year to $557 million and beat analysts' estimates by $18 million.

On a GAAP (generally accepted accounting principles) basis, Snowflake's net loss widened year over year from $155 million to $201 million. But on a non-GAAP basis, which excludes its stock-based compensation and other one-time expenses, its net profit more than tripled to $38 million, or $0.11 per share, and cleared the consensus forecast by six cents.

A digital circuit shaped like a snowflake.

Image source: Getty Images.

Snowflake's headline numbers were impressive, but its stock remains down about 60% this year. Concerns about its decelerating growth and widening GAAP losses initially drove away the bulls, while rising interest rates and other macro headwinds exacerbated that painful sell-off. Could it finally be time to turn bullish on this beaten-down growth stock?

Is Snowflake's growth cooling off?

Large companies often store their data on a wide range of software, computing platforms, and hardware across multiple departments. That fragmentation creates opaque silos, which make it difficult to gauge a company's overall performance.

Snowflake's platform aggregates all of that fragmented data in a cloud-based data warehouse, where it can be easily accessed by third-party analytics and visualization services to make better data-driven decisions. Instead of charging recurring subscription fees, it charges usage-based fees -- so its customers only pay for the computing power they actually need.

Snowflake initially dazzled the bulls with its triple-digit growth in product revenue (which accounted for most of its top line) in fiscal 2021 and 2022. Its net revenue retention rate, which gauges its year-over-year revenue growth per existing customer over a trailing 24-month period, also remained above 160% as its gross and operating margins improved.

Metric

FY 2021

FY 2022

First nine months of FY 2023

Product revenue growth (YOY)

120%

106%

77%

Net revenue retention rate

168%

178%

165%

Non-GAAP product gross margin

69%

74%

75%

Non-GAAP operating margin

(38%)

(3%)

4%

Data source: Snowflake. YOY = Year-over-year.

Snowflake's product revenue growth cooled off throughout fiscal 2023, but its gross and operating margins continued to expand. For the full year, it expects its product revenue to increase 68% to 69%, with a non-GAAP gross margin of 75% and a non-GAAP operating margin of 3%. Those improving margins suggest it could eventually achieve GAAP profitabiity if it reins in stock-based compensation, which consumed a whopping 41% of its revenue in the first nine months of fiscal 2023.

Over the long term, Snowflake still expects to generate $10 billion in product revenue by fiscal 2029. That implies its top line could grow at a compound annual growth rate (CAGR) of 36% from fiscal 2022. By fiscal 2029, it expects about 1,400 of its customers to be contributing more than $1 million in annual product revenue, compared to just 287 of those high-value customers in the third quarter of fiscal 2023.

Why aren't investors more bullish on Snowflake?

Snowflake's growth rates are robust, but four issues are preventing the bulls from rushing back.

First, Snowflake is still richly valued. With an enterprise value of $40 billion, it trades at 19 times this year's sales and 13 times next year's sales. Second, investors will continue to shun GAAP-unproftable companies as long as interest rates continue to rise.

Third, Snowflake still faces plenty of competitors, including Amazon (AMZN -0.32%) Web Services' (AWS) Redshift and Microsoft's (MSFT 1.33%) Azure SQL Database, in the cloud-based data warehousing race.

Amazon and Microsoft can both bundle their competing services into their own cloud infrastructure platforms at low prices to pull customers away from Snowflake. Snowflake also runs its warehousing platform on top of AWS and Azure, since it doesn't have its own cloud infrastructure platform, so it's actually paying cloud hosting fees to its largest competitors.

Lastly, Snowflake isn't immune to macro headwinds. During the Q3 conference call, CEO Frank Slootman said the company was "aware of the weakening macro economy," while CFO Mike Scarpelli noted it faced macro headwinds across the consumer internet, technology, media entertainment, and advertising sectors over the past year.

The strength of the financial sector, the company's top vertical, is offsetting those weaknesses -- but a recession could still cause that growth engine to sputter.

Is it the right time to buy Snowflake?

Snowflake is still growing like a weed, but its high valuation and GAAP losses will cap its near-term gains as the bear market drags on. I don't mind paying a premium for a potential multibagger, but Snowflake needs to significantly reduce its stock-based compensation as a percentage of its revenue before I consider it to be a worthwhile long-term investment.