Snowflake (SNOW 1.54%) has emerged as a top provider of data-warehousing services that make it possible to arrive at superior analytics results. But while the company has been expanding at a rapid pace, the business is seeing some growth deceleration, and its share price has also been pressured by unfavorable macroeconomic conditions. Following a recent round of sell-offs, the company's stock is down roughly 3% year to date and trades off 65% from its high.
Does the stock present a worthwhile buying opportunity after some big sell-offs, or are shares still overvalued? Read on for a look at bullish and bearish trends, characteristics, and dynamics that could determine what comes next for Snowflake stock.
Bull: Strong business performance and long-term growth opportunities
Snowflake's Data Cloud platform provides best-in-class data-warehousing solutions and has been enjoying strong demand. With 7,828 customers at the end of its last fiscal year, the company managed to increase its total client base by 31% annually. Additionally, it continued to build its relationships with existing customers and closed out its last quarter with a net-revenue-retention rate of 158%, which means that customers already using its services increased their spending by 58% compared to the prior-year quarter.
Between new customer additions and increased spending from existing clients, the data services specialist grew its product revenue by 70% last year to reach approximately $1.94 billion. While Snowflake forecasts that product revenue growth will decelerate to 40% this year, in large part due to macro pressures, it has intriguing long-term growth opportunities.
Beyond strong performance for its core data warehousing and analytics services, Snowflake is also seeing encouraging results from its other growth drivers. Total data marketplace listings increased 8% sequentially in the third quarter to reach over 1,800, and the total number of registrants on the Powered By Snowflake app-building platform was up 20% on a sequential basis.
The core data-warehousing services will remain the company's biggest growth driver for the foreseeable future, but the software provider appears to be successfully building a broader ecosystem capable of powering long-term growth. The potential for Snowflake's platform to become a popular destination for building and scaling applications is particularly intriguing. If the company can continue to attract new applications projects to Powered By Snowflake, it will have opportunities to benefit as these apps grow and evolve over the long term.
Bear: Competitive threats and risky valuation
Snowflake has built an early leadership position in data-warehousing services, but this is still a relatively young market, and it's possible that unforeseen developments will upend its growth opportunities. There's a risk that leading cloud-infrastructure providers, including Amazon, Microsoft, and Alphabet, will devote more resources to addressing the service category that Snowflake is operating in.
Microsoft's Azure Synapse platform provides some similar data integration and warehousing services to what Snowflake is offering, and Amazon's RedShift and Alphabet's Google BigQuery have comparable overlap with their own respective cloud infrastructures. In general, Snowflake's platform offers some significant advantages when it comes to features, integrations, and pricing flexibility, but it does face competition from the cloud leaders despite also being partners with them. Snowflake also faces competition from other enterprise software giants, including Oracle and SAP.
SNOW P/S Ratio (Forward) data by YCharts.
With the company valued at more than 15 times the expected sales for this year and more than 30 times the projected non-GAAP (adjusted) free cash flow, the data specialist's valuation is undoubtedly risky. If competitive pressures ramp up and cause the business to fall short of expectations, it's reasonable to expect that Snowflake stock will continue to tumble. Additionally, the company's valuation profile puts it at an outsized risk of seeing big sell-offs if high levels of inflation, rising interest rates, and other macroeconomic headwinds continue to create bearish pressures for the broader market.
Should you buy Snowflake stock today?
For investors who don't have above-average risk tolerance, Snowflake stock is probably a no-go. The company's highly forward-looking valuation creates plenty of potential for things to go awry and send its share price tumbling below current levels, and the business's long-term outlook remains speculative.
On the other hand, I do believe that the stock offers an appealing reward profile for risk-tolerant investors seeking potentially explosive technology plays. Snowflake is providing top-tier data technologies that are resonating with its target market, and the company looks poised to enjoy long-term demand tailwinds as analytics becomes an increasingly important part of business operations and application services. This is certainly a high-risk, high-reward stock, but I believe it's a worthwhile buy for growth-oriented investors.
