Snowflake Stock Has Crashed. Here's Why That's a Good Thing.

Shares of Snowflake (SNOW 2.69%) were in meltdown mode after the company released its fiscal 2024 first-quarter results on May 24 for the three months ended April 30. This isn't surprising given the tepid guidance issued by the cloud-based data platform provider. The stock fell more than 15% last week.

Let's look at the reasons why investors hit the panic button before checking why it may be a good idea to buy shares of Snowflake following its sharp decline.

A guidance cut has investors worried

For the latest quarter, Snowflake saw revenue grow a robust 48% year-over-year to $624 million, easily clearing the Wall Street consensus estimate of $610 million. The company's adjusted earnings came in at $0.15 per share, a big jump over the break-even earnings it posted in the prior-year period. Analysts would have settled for earnings of $0.05 per share.

But in its guidance for current quarter underway, Snowflake expects slower year-over-year product revenue growth of 34% to $625 million at the upper end of its guidance range. That's a big drop from the 50% growth Snowflake delivered last quarter. Even worse, the company has slashed its full-year guidance.

It now expects fiscal 2024 product revenue to increase 34% to $2.6 billion. It was earlier expecting a 40% bump in product revenue to $2.7 billion, but a change in customer spending patterns led the company to scale down its guidance. CEO Frank Slootman pointed out on the latest earnings conference call:

We are, however, operating in an unsettled demand environment, and we see this reflected in consumption patterns across the board. While enthusiasm for Snowflake is high, enterprises are preoccupied with costs in response to their own uncertainties.

In simpler words, customers are scaling back their spending on Snowflake's offerings thanks to an uncertain macroeconomic environment. That's not surprising as there has been a marked slowdown in public cloud spending this year. More specifically, public cloud revenue has increased at a far slower pace of 19% in the first quarter of 2023 compared to 32% in the year-ago period.

Market research firm IDC estimates that cloud infrastructure spending is expected to increase just 7% this year compared to last year's jump of 19%. So Snowflake's guidance cut doesn't come across as a surprise given that it provides a data cloud platform that allows customers to generate insights and predictions from unstructured, structured, or semi-structured data using the company's data warehouse, data lake, and Unistore solutions.

A better deal on the stock now

Snowflake needed to deliver better-than-expected guidance to justify its expensive valuation. The stock trades at a whopping 21 times sales, which is way higher than the S&P 500's average multiple of 2.4. But now that it has failed to justify such an expensive valuation, the stock could head lower given the headwinds that it is forecasting in the near term.

Savvy investors, however, may want to take advantage of the opportunity to buy Snowflake stock. That's because the company stands to win big from its massive addressable market worth $248 billion in the long run. This also explains why analysts are expecting Snowflake to consistently deliver strong growth over the next couple of years.

Source: YCharts

More importantly, the company is quickly building up a solid customer base to tap into the massive addressable opportunity it is sitting on. Its total customer base shot up 29% year over year last quarter to almost 8,200. What's more, the number of customers who have spent at least $1 million on its offerings in the trailing-12-month period increased 80% year over year to 373.

Snowflake also clocked an impressive dollar-based net revenue retention rate of 151% during the quarter. As the metric compares the revenue generated by Snowflake's customers at the end of a particular period to the revenue generated by the same customer cohort in the year-ago period, a reading of more than 100% suggests that those customers either purchased more of its solutions or increased the usage of its existing solutions.

The increased customer spending and improvement in the number of customers helped Snowflake finish fiscal Q1 with $3.4 billion worth of remaining performance obligations, a jump of 31% over the year-ago period. This metric refers to the contracted future revenue that's yet to be recognized by Snowflake. So the company has already built a healthy future revenue pipeline that should help it regain its mojo.

In all, it can be concluded that Snowflake's latest setback shouldn't impact its long-term potential. So investors looking to invest in a cloud stock should consider taking advantage of the drop in Snowflake to buy shares as it could eventually turn out to be a solid pick for the future.