Shares of Snowflake (SNOW -2.35%) tumbled 12% on March 3 after the cloud-based data warehousing company posted its latest quarterly report.

In the fourth quarter of fiscal 2023, which ended on Jan. 31, its revenue rose 53% year over year to $589 million and beat analysts' expectations by $14 million. Its adjusted net income increased 35% to $49 million, or $0.14 per share, and cleared the consensus forecast by $0.09.

For the full year, revenue grew 69% to $2.07 billion -- decelerating from its 106% growth in fiscal 2022 -- as its adjusted net income jumped from $2 million to $90 million.

Looking ahead, management expects product revenue (which accounted for 94% of its top line in fiscal 2023) to rise 44% to 45% year over year in the first quarter and 40% for the full year.

An electrical circuit shaped like a snowflake.

Image source: Getty Images.

That outlook slightly missed analysts' expectations and triggered Snowflake's post-earnings sell-off. But after tumbling nearly 50% over the past 12 months, will this hyper-growth stock finally recover this year?

A disruptive approach to storing data

Large companies often store their data across a wide range of software and computing platforms. That inefficient approach creates fragmented silos, which makes it difficult to quickly make data-driven decisions.

Snowflake addresses that problem by pulling all of that data into a centralized cloud-based data warehouse, which can be easily accessed by third-party data visualization and analytics applications. It operates on a usage-based model, which only charges companies for the storage and computing power they need instead of locking them into subscriptions.

That flexibility made Snowflake an attractive alternative to other cloud-based data warehouses like Redshift from Amazon Web Services and Microsoft's Azure Synapse, which both lock their customers into subscription-based cloud infrastructure platforms.

Slower growth, rising margins

When it went public on Sept. 16, 2020, Snowflake dazzled investors with its triple-digit growth in product revenue and high net revenue retention rate (a measure which gauges its year-over-year growth per customer). That's why its stock more than doubled from its IPO price of $120 to $245 on its first trade, and eventually hit an all-time high of $401.89 on Nov. 16, 2021.

At its peak, Snowflake's enterprise value hit $119 billion -- or 98 times the revenue it would generate in fiscal 2022. That bubbly valuation made it an easy target for the bears as rising interest rates drove investors away from hyper-growth tech stocks.

In fiscal 2023, its growth in product revenue decelerated again as its net revenue retention rate declined. But its product gross margin and operating margin both expanded on a non-GAAP (generally accepted accounting principles) basis:

Metric

Fiscal 2021

Fiscal 2022

Fiscal 2023

Product revenue growth (YOY)

120%

106%

70%

Net revenue retention rate

168%

178%

158%

Non-GAAP product gross margin

69%

74%

75%

Non-GAAP operating margin

(38%)

(3%)

5%

Data source: Snowflake. YOY = year over year.

Snowflake attributed that slowdown, which will persist with its target of 40% product revenue growth in fiscal 2024, to macroeconomic headwinds. During the latest conference call, Chief Financial Officer Mike Scarpelli said that "people are watching their costs" in this tight economy, but that "as quickly as they can turn Snowflake off, they can ramp it up very quickly."

As its near-term growth cools off, it expects its non-GAAP product gross margin to expand to 76% in fiscal 2024 as economies of scale kick in for its cloud infrastructure expenses. It also expects its non-GAAP operating margin to rise to 6%.

But unlike many other tech companies, Snowflake isn't cutting jobs. Instead, it plans to hire more than 1,000 new employees this year, and expects its adjusted free cash flow (FCF) margin to hold steady year over year at 25% in fiscal 2024.

Yet, Snowflake still isn't anywhere close to profitable on a GAAP basis. Its net loss widened from $680 million in fiscal 2022 to $797 million in fiscal 2023, mainly due to the $889 million in stock-based compensation expenses that consumed 43% of its revenue. That percentage will likely remain elevated in fiscal 2024 as it expands its workforce again.

Where will Snowflake's stock be in a year?

Snowflake expects to generate $10 billion in product revenue by fiscal 2029, which implies its top line will grow at a compound annual rate of 32% from fiscal 2023. It reiterated that forecast during the conference call.

With an enterprise value of $50.3 billion, Snowflake still trades at about 16 times its fiscal 2024 revenue. That high valuation might seem reasonable relative to its growth rates, but it will probably limit its upside potential until inflation is tamed, interest rates stabilize, and investors rotate back from value stocks toward higher-growth tech plays.

I believe the macroeconomic situation will remain volatile over the next 12 months, so I don't think Snowflake will outperform the broader market. Instead, it will likely continue to tread water until its business catches up to its valuation.