Snowflake (SNOW 0.93%) just left investors out in the cold.

The data warehousing specialist had long been among the fastest growers in cloud computing, but its first-quarter earnings report shows that it can't escape the broader challenges in the sector. Snowflake offered disappointing guidance in its first-quarter earnings report, sending the stock down 17% on the news as the company forecast a significant decline in revenue growth over the remainder of the year. 

Product revenue in the first quarter grew 50% to $590.1 million, and overall revenue rose 48% to $623.6 million, which topped estimates at $608.4 million.

However, other metrics pointed to slowing growth for the data cloud provider, which allows customers to store, share, and bring together siloed data. Remaining performance obligations, a way of measuring backlog, rose just 31%, and management guided for second-quarter product revenue growth of just 33% to 34%, to $620 million to $625 million. It also cut its full-year product revenue guidance of 34% growth to $2.6 billion, implying revenue growth in the second half of the year in just the mid to high 20% range.

The chart below shows the company's performance in the first quarter, and while revenue was strong for Snowflake, you can see that on the basis of generally accepted accounting principles (GAAP), its losses continued to widen in the quarter, which is a function of increased spending on research and development, which nearly doubled, and share-based compensation, which was up 53% from the year-ago quarter to $264.5 million.

A chart showing Snowflake's financial performance in the first quarter.

As a result of that sizable share-based compensation, which totaled more than 40% of its revenue, Snowflake posted strong free cash flow in the first quarter at $283.1 million, or 45% margins, but the profitability picture is more complicated than that.

The valuation question 

Even after the stock's plunge on the earnings report, Snowflake still trades at a price-to-sales ratio of 23, a lofty valuation for any stock, but especially one with a rapidly decelerating growth rate with a wide GAAP loss in an environment of rising interest rates.

With the stock down 63% from its peak in 2021, Snowflake's valuation has come down considerably, but the falling price creates a problem for management beyond the optics and shareholder frustration.

With share-based compensation making up more than 40% of the company's revenue, the falling stock price makes the stock considerably less valuable and could put further pressure on share dilution, which has been modest because the stock is so highly priced and because management is repurchasing stock to limit dilution.

Will Snowflake recover?

On the earnings call, management fielded several questions about its plans to reignite revenue growth 

As a consumption-based model, Snowflake is more sensitive to current demand than subscription-based models, and CEO Frank Slootman noted "an unsettled demand environment," adding, "While enthusiasm for Snowflake is high, enterprises are preoccupied with costs in response to their own uncertainties."

Slootman expressed confidence that the demand trend would recover, saying, "Cycles like this eventually run their course."

He also pointed to the opportunity in generative artificial intelligence (AI), but Snowflake's guidance cut presented a clear contrast with Nvidia, which called for revenue growth to soar in the current quarter due to demand for AI chips. Snowflake clearly isn't experiencing the same benefit from the AI boom, though that could eventually come as large data sets will be needed to train generative AI models.

Lastly, the company is also seeing interest in new products like Snowpark, which allows developers to write code in their preferred language and then run it directly on Snowflake. About 800 customers engaged with Snowpark for the first time in the first quarter, and 30% of all of its customers are using Snowpark on at least a weekly basis, up from 20% in the previous quarter.

Snowflake's growth slowdown mirrors what Amazon Web Services has seen as it has also pointed to spending optimization as a reason for slower growth.

The risk here is that companies continue to optimize even as the macroeconomic environment improves. For Snowflake investors, who are still paying more than 20 times sales for the stock, that's another headwind worth considering.

At this point, despite the stock's plunge, the price still seems to reflect a best-case scenario.

While Snowflake will continue to grow, investors are better off waiting for a better entry point, especially in the current macro environment as sales growth is unlikely to accelerate until at least next year.