What happened
Shares of cloud-based data company Snowflake (SNOW -1.46%) were down 10.9% in November, according to data provided by S&P Global Market Intelligence. The stock had huge gains after encouraging macro-economic news -- a crucial part of the story that I'll tell here. And the company also reported quarterly financial results that helped it gain ground at the end of the month. But overall, the stock was trending downward throughout the month.
So what
Bear with me, but let's start with the end of Snowflake's November journey first. On Nov. 30, it reported financial results for the third quarter of its fiscal 2023. Initially the stock tanked in after-hours trading before recovering during normal trading hours.
In Q3, Snowflake generated total revenue of $557 million, up a whopping 67% year over year. Most companies would be elated with such growth. But for Snowflake, 67% growth represents a significant slowdown from the 84% and 83% growth its posted in the first quarter and second quarter respectively. Moreover, management guided for "just" 49% to 50% growth in the upcoming fourth quarter.
Snowflake's growth has slowed. But here's the thing: Assuming the company hits management's Q4 guidance, the stock still trades at a price-to-sales (P/S) valuation of 25, as of this writing. That's a premium valuation no matter how you slice it.
Premium valuations tend to come down when growth slows. And valuations also tend to come down in rising interest rate environments.
Which brings me back to Snowflake's biggest gains in November. The stock gained over 25% just from Nov. 10 through 11, simply because of encouraging news regarding inflation. The Federal Reserve has been raising interest rates in hopes of taming inflation. But with the encouraging data, investors are hoping interest rates can start coming back down.
If interest rates come down, investors are hoping that Snowflake's lofty valuation can be better supported, which is why it gained so much during just those two days.
However, this article isn't why Snowflake was up, but rather why it was down for the month. Overall, the stock drifted lower on fears of slowing growth -- which affected other cloud companies as well -- and because analysts were lowering their price targets throughout the month.
Now what
During Q3, Snowflake gained nearly 500 new customers, those customers increased spending dramatically year over year, and remaining performance obligations (revenue under contract) hit a record $3 billion. This still points to the strength of the business here.
Therefore, Snowflake is a stock to watch for me. I do believe that its stock price can keep coming down as its growth rate slows in coming quarters. However, I can't deny this is a strong business and one I'd like to own once the valuation makes better sense.
