Snowflake (SNOW 3.69%) is a leading provider of data warehousing and analytics tools, but the company's stock has seen some turbulent trading as investors became more risk-averse. The cloud software company's share price is down roughly 39% from its market close on the day of its September 2020 initial public offering and 62% from the lifetime valuation high that it reached in November 2021.
Should investors be snatching up this potentially explosive growth stock on the heels of a big valuation pullback, or is there still too much downside risk to make shares an attractive buy at today's prices? Read on for a look at bullish and bearish dynamics and catalysts that could shape where Snowflake stock goes next.
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Green flag: Great business performance and long-term growth potential
Snowflake's business is growing at an incredible clip, and performance last year came in significantly better than the company's own guidance and Wall Street expectations. Product revenue increased roughly 70% annually to hit about $1.94 billion, and the business recorded a non-GAAP (adjusted) gross margin of 75% in the period. The data specialist's adjusted free-cash-flow (FCF) margin also increased to 25% from 12% in the previous fiscal year.
Snowflake's consumption-based billing model has made it easy for customers to flexibly adopt and scale the company's services, and the business still has massive potential for expansion over the long term. By 2026, Snowflake expects that it will have an addressable market of approximately $248 billion, and its potential market opportunity will likely continue to expand from there.
For its fiscal year ending in January 2029, the company expects that it will record $10 billion in product revenue -- suggesting growth of roughly 415% compared to last year's figure. It's not unreasonable to think that the business will be able to continue delivering solid, double-digit sales growth from there.
In addition to its core data-warehousing, analytics, and collaboration services, Snowflake is positioning its platform as a foundation for developing and running applications. Data-warehousing tools will become increasingly important as more companies rely on analytics and artificial intelligence, and the company could enjoy the benefits of a powerful new business pillar if customers choose to build and scale apps on its platform.
Red flag: Slowing growth and unfavorable macro conditions
Snowflake has a heavily growth-dependent valuation, and it's been coming up against a more challenging macroeconomic backdrop.
SNOW PS Ratio (Forward) data by YCharts
The company is valued at more than 17 times this year's expected sales, and it forecasts a substantial sales growth deceleration this year. Largely due to macroeconomic shifts, management forecasts that annual product revenue growth will cool down to 40% this fiscal year.
With macroeconomic pressures already hitting and the potential for worsening conditions on the horizon, Snowflake saw slowdowns in customer additions and spending growth. Customers became more cost-conscious and moderated or delayed growth initiatives, and the trend had a noticeable impact on Snowflake's performance and near-term performance outlook.
With such a growth-dependent valuation, Snowflake stock could face substantial bearish pressures if business performance comes in below expectations. Even if the company meets or exceeds its targets, it's possible that macroeconomic developments will create turbulence for its share price. If inflation continues to run hot, the Federal Reserve may opt to continue raising interest rates, and that could introduce new selling pressures for Snowflake stock.
Is Snowflake stock a smart buy right now?
Snowflake has some compelling strengths and exciting growth opportunities, but investors should weigh their personal risk tolerance before establishing a large position in the stock. Macro pressures have started to tamp down on growth, and the data specialist's growth-dependent valuation opens the door for outsize sell-offs if economic conditions veer off in unfavorable directions. Unless you're willing to embrace volatility, it's probably best to avoid the stock.
On the other hand, growth-focused long-term investors with above-average risk tolerance may find a lot to like about the stock. Snowflake has been scaling its business at an impressive clip, and it could be establishing a dominant position in a technology niche with huge room for growth over the long term. Charting the company's future performance trajectory involves a high degree of speculation, but the core business looks quite strong, and those who take a buy-and-hold approach with its stock could wind up being richly rewarded.
