Snowflake (SNOW 3.69%) has established itself as a leader in a promising corner of the data services industry, but its stock has faced some intense pressures lately. Facing decelerating sales growth and macroeconomic pressures that have generally caused investors to be more risk-averse, the company's share price has fallen roughly 64% from its high.
Should you be buying this innovative company's shares on the heels of its big valuation pullback, or is there still too much downside risk to make it a worthwhile investment? Read on for a look at bullish and bearish factors, and dynamics that could shape the data specialist's long-term stock performance.
Green flag: Snowflake is a hit with enterprise customers
Snowflake's Data Cloud platform makes it possible to combine and analyze data generated across Amazon, Microsoft, and Alphabet's respective cloud infrastructure services. The company also provides data-marketplace and application-building services. More than ever before, enterprises are relying on analytics to shape business strategies and power applications, and Snowflake's technology is making it possible for customers to get a data picture that's far more complete.
Given that large enterprises tend to be particularly data-driven and have larger project budgets, it makes sense that large businesses are at the heart of Snowflake's growth engine. The company is indeed enjoying plenty of success with customers in the category. Of the Forbes Global 2000 companies, 573 were Snowflake customers at the end of fiscal 2023, up 16% from the previous year.
Snowflake ended the fourth quarter of its last fiscal year with 7,828 customers, representing growth of 31% year over year. Of those customers, 330 generated trailing twelve-month product revenue of more than $1 million -- with the cohort's count up 79% YOY. The company is finding success in attracting new enterprise customers and growing relationships with those already using its services. That bodes well for its ability to ride out periods when macroeconomic conditions create headwinds.
Red flag: Macro conditions may create bearish pressures
Even after some big pullbacks for the company's share price, Snowflake still trades at a highly growth-dependent valuation.
SNOW PS Ratio (Forward) data by YCharts
With the company valued at more than 16 times this year's expected sales, some strong growth is already priced into the company's stock. If the business fails to deliver margins and revenue increases that meet expectations, it's reasonable to expect its share price to tumble.
Additionally, Snowflake's growth-dependent valuation puts it at risk of seeing outsized sell-offs should macroeconomic conditions worsen. If inflation continues to run hot and the Federal Reserve keeps raising rates, that's likely to create additional valuation pressures. Meanwhile, a sustained economic downturn could cause the company's customers to cut back on service consumption or introduce downward pressures on service pricing.
Is Snowflake a buy?
Snowflake is a promising company with category-leading offerings in its corner of the data services market, but the company's stock is also a high-risk investment. The data services specialist trades at a highly growth-dependent valuation, and the company's stock probably isn't a good fit for risk-averse investors.
On the other hand, I would argue that investors who take a buy-and-hold approach to Snowflake stock at today's prices should ultimately enjoy strong returns. While risk factors could impact the company's valuation negatively, the software specialist appears to have built a foundation that will pave the way for strong performance over the long term. Of course, near-term trading could continue to be turbulent, but I think the stock is a worthwhile buy for risk-tolerant investors seeking potentially explosive growth plays.
