Shares of data cloud specialist Snowflake (SNOW -1.61%) were slammed on Thursday. The stock sank more than 16% as investors digested the company's latest quarterly update. While the company's top- and bottom-line results exceeded analysts' average forecast for the two metrics, investors are coming to terms with the company's growth rates quickly decelerating. This has been evident both in recent quarterly results and management's expectations for further top-line deceleration in fiscal quarter two.
But given the growth stock's pullback, many investors may be wondering whether now is a good time to buy the stock. After all, management reiterated its aggressive long-term target to reach $10 billion of annual product revenue in approximately five years. That would be a huge jump from the company's current annualized run rate of product revenue of about $2.4 billion (based on an extrapolation using the company's just-reported fiscal first-quarter results).
Snowflake is still growing rapidly
Don't let all this talk of a slowdown in the data cloud platform provider's business fool you: Snowflake is still growing quickly. Fiscal first-quarter revenue rose 48% year over year to $623.6 million. Product revenue rose 50% year over year to $590.1 million. That helped the company's adjusted earnings per share reach $0.15, up from zero cents in the year-ago quarter. Analysts, on average, were expecting total revenue and adjusted earnings per share of $608 million and $0.05, respectively.
Management also said it wrapped up the period with 373 customers who have contributed $1 million or more in trailing-12-month revenue to Snowflake's business. This is up from 330 three months earlier and 206 customers in the year-ago period.
Even though Snowflake's business is clearly gaining traction with customers, there's no denying that there's been a material deceleration in its growth rates. For instance, Snowflake's product revenue growth rate of 48% for its first quarter of fiscal 2024 is a far cry from the company's 70% growth in product revenue for the full year of fiscal 2023. Looking to fiscal quarter two, management expects further meaningful deceleration. Snowflake guided for fiscal second-quarter revenue to increase between 33% and 34% year over year.
Patience may pay off
Investors, of course, would be wise to zoom out and look beyond the current macroeconomic environment. As Snowflake CEO Frank Slootman said in the company's fiscal first-quarter earnings call regarding the current uncertainty in the economy, "These things run their course." He would know; Slootman has operated as an executive at various tech companies during a number of difficult macroeconomic environments, including 9/11, the subprime mortgage crisis and accompanying Great Recession, and the COVID-19 pandemic.
Nevertheless, investors also don't need to rush into an investment just because the stock price has come down and they are confident in a business over the long term. There's good reason for investors interested in Snowflake stock to exercise caution -- and that reason is the stock's nosebleed valuation.
Despite commanding a $48 billion market capitalization, the company is far from becoming profitable. Snowflake's operating loss in fiscal Q1 alone was approximately $273 million. This was significantly more than the company's operating loss of about $189 million in the year-ago quarter.
Any skittishness in the market related to growth stocks with sky-high valuations could easily lead to a much bigger pullback in Snowflake's stock price. During times like this, investors should give an investment like this more serious consideration.
