Snowflake (SNOW 3.69%) stock hasn't set the market on fire in 2023 so far. Shares of the cloud-based data platform provider have remained flat this year, which pales in comparison to the 15% gains logged by the Nasdaq Composite index.
Snowflake's tepid performance may seem a tad surprising at first, given that the company reported terrific growth when it released its fiscal 2023 results earlier this year. However, management's cautious tone about the company's near-term performance amid a pullback in customer spending has weighed on the stock. But is Snowflake's underperformance on account of a near-term slowdown an opportunity for savvy investors to buy it? Let's find out.
Snowflake's slowdown should be temporary
Snowflake's guidance for the first quarter of fiscal 2024, which ended on April 30, 2023, points toward a significant slowdown from the 70% growth in revenue to $1.9 billion that the company reported last fiscal year. Snowflake management expects fiscal Q1 revenue to increase 44.5% to $570 million at the midpoint of its guidance range. The full-year revenue is expected to jump 40% to $2.7 billion.
While that's still impressive, Snowflake CFO Mike Scarpelli warned on the March earnings conference call that the "change in existing customer purchasing behavior, lower-than-expected new logo bookings, and slower expected ramp from our youngest cohorts has led us to reevaluate our FY '24 outlook," which set the alarm bells ringing. What's more, Scarpelli added that Snowflake's bookings in the fourth quarter of fiscal 2023 were below expectations and the company's international business declined.
But then, it would be wrong to read too much into Snowflake's near-term guidance given its consumption-based pricing model instead of a subscription-based one. Under the consumption-based model, Snowflake customers only need to pay for the services they use. This is different from a subscription model under which customers pay a fee regardless of their usage.
The advantage of a consumption-driven model is that it lowers the entry barrier for customers looking to use Snowflake's data warehousing, data lake, data science, data engineering, and cybersecurity solutions. The downside, however, is that this business model reduces the company's revenue visibility since customers are free to tone down usage when they want to. A more flexible billing model will always be less predictable than a straight monthly fee.
This is evident from Scarpelli's comment on the earnings call that "customers have the contractual right to sign smaller deals to bridge them to their contract end date." The CFO, however, is confident that the near-term customer spending patterns aren't representative of the long-term prospects of the market it serves.
This explains why the company is planning to hire more than 1,000 employees in the current fiscal year to bolster its engineering, product, and sales teams. Additionally, Snowflake is confident of hitting $10 billion in revenue in fiscal 2029, which would represent a 5x increase over its top line last year. Even then, there would be a massive end-market opportunity for Snowflake to tap into.
The company sees a $248 billion addressable market for its offerings by 2026, indicating that this tech stock could sustain its impressive growth for a long time to come. Not surprisingly, analysts are confident of outstanding growth in the company's top line.
SNOW Revenue Estimates for Current Fiscal Year data by YCharts
Even better, analysts expect Snowflake to deliver stronger earnings growth over the next couple of years. They now expect the company to post earnings of $0.60 per share in fiscal 2024 as compared to an expectation of $0.51 per share three months ago. In fiscal 2025, Snowflake is expected to deliver $1.01 per share in earnings, up from an estimate of $0.95 per share three months ago.
What should investors do?
Snowflake is underperforming the market in 2023, but a 12-month median price targetof $180 based on a consensus of 36 analysts suggests that it could deliver 24% gains from its current stock price. It won't be surprising to see the stock regain its mojo given that it is on track to clock healthy growth despite headwinds.
However, this cloud play is trading at an expensive 23 times sales. The rich valuation doesn't make sense given the potential slowdown that the company is anticipating in the short run, but it could also be a blessing in disguise. If Snowflake stock drops thanks to its high valuation and slowing near-term growth, savvy investors should consider taking advantage of the dip given the multibillion-dollar opportunity it is sitting on, which could help it clock annual earnings growth of 66% over the next five years as per consensus estimates.
