Shares of data cloud platform provider Snowflake (SNOW 3.69%) have endured a rough August so far. The tech stock has declined more than 15% as of this writing. The pullback in the stock price may have some investors wondering whether this may be a good time to buy the stock. This question is particularly timely given that the fast-growing company is scheduled to report its second-quarter results for fiscal year 2024 next week.
So, is Snowflake stock a buy ahead of earnings? To help investors consider whether buying shares of the tech company makes sense today, let's look at its recent business trends, what management has been saying, and the growth stock's valuation.
Growth is key
Snowflake is growing fast. Product revenue (95% of Snowflake's total revenue) in its most recent quarter rose 50% year over year. And this growth is occurring off of a large base. Its annual revenue is well over $2 billion.
Nevertheless, growth is one of the key concerns among investors regarding Snowflake these days. This is because its growth rate has been decelerating rapidly. For instance, management recently guided for full-year fiscal 2024 product revenue to grow 34% year over year, down from the company's full-year fiscal 2023 product revenue growth rate of 70%.
"We are ... operating in an unsettled demand environment, and we see this reflected in consumption patterns across the board," said Snowflake CEO Frank Slootman in the company's fiscal first-quarter earnings call.
With its growth rate coming down so quickly in recent quarters, many investors will likely pay close attention to Snowflake's reported product revenue growth rate for fiscal Q2 when it releases its earnings report on Wednesday.
Management guided for product revenue for the period ended July 31 to grow 33% to 34% year over year. So, investors should look for Snowflake to report growth in this range or better.
Profitability matters, too
Another area investors should check in on is Snowflake's operating loss. While the company's operating loss has been getting worse in absolute numbers, it has been improving as a percentage of product revenue. Investors should look for this to continue. Of course, it would be preferable that Snowflake's operating loss stops growing as a percentage of sales, too.
One of the reasons Snowflake has been in the hot seat recently is because the stock's high valuation demands continued rapid growth. Any more significant deceleration beyond what management has already articulated could make investors question the extraordinary premium the stock commands.
Highlighting the stock's wild valuation, Snowflake currently has a market capitalization of nearly $49 billion despite its operating loss coming in at $916 million for the trailing-12-month period ended April 30, 2023. This market cap puts the company's price-to-sales ratio at a staggering 21.
With a valuation like this, Snowflake needs to show investors that its product revenue growth rate will stop decelerating soon. A high valuation demands exceptional execution.
Given this backdrop, it may be wise to hold off on buying shares until Snowflake's top-line growth trends stop decelerating so quickly and the company's operating loss begins narrowing instead of widening.
