Is Snowflake Stock a Buy?

Snowflake (SNOW 3.69%) posted its latest earnings report on Aug. 23. For the second quarter of fiscal 2024, which ended on July 31, the cloud-based data warehousing company's revenue rose 36% year over year to $674 million and exceeded analysts' estimates by $12 million. Within that total, its product revenue climbed 37% to $640 million.

Snowflake's adjusted net income surged more than 17 times year over year to $80 million, or $0.22 per share, and cleared the consensus forecast by $0.12 per share. But on a generally accepted accounting principles (GAAP) basis, its net loss still widened from $223 million to $227 million. Snowflake's stock rallied slightly after that earnings beat, but it remains more than 60% below its all-time high set in late 2021. Is it finally the right time to turn bullish on this data specialist?

Image source: Getty Images.

Another quarter of slowing growth

Large organizations often store their data across a wide range of computing platforms, on-site software, and cloud-based services. That fragmentation creates "data silos" that make it difficult to make efficient data-driven decisions. Snowflake's cloud-based data warehouse breaks down those silos by aggregating all of that data onto a unified platform, where it can be easily accessed by other data visualization and analytics applications.

Cloud infrastructure giants like Amazon and Microsoft also provide their own integrated data warehouses, but many companies aren't eager to lock themselves into those walled gardens. Snowflake's usage-based model -- which only charges companies for the storage and computing power they need -- also makes it an attractive alternative to signing sticky contracts with the bigger cloud giants.

That's why Snowflake has grown like a weed over the past few years. But if we look at Snowflake's growth in product revenue (which accounts for most of its top line) and net revenue retention rate (which gauges its year-over-year revenue growth among existing customers) over the past three and a half years, we'll spot a significant slowdown.

Data source: Snowflake. YOY = year-over-year.

For fiscal 2024 (which ends next January), Snowflake expects its product revenue to rise 34%. During its latest conference call, CEO Frank Slootman attributed that ongoing slowdown to an "unsettled macro environment" that was causing companies to rein in their software spending, but CFO Mike Scarpelli said Snowflake also saw "promising signs of stabilization" as its new bookings in the second quarter outperformed its own expectations.

Assuming it can hit its full-year forecast, Snowflake will still need to grow its product revenue at a compound annual growth rate (CAGR) of 31% through fiscal 2029 to achieve its long-term goal of generating $10 billion in product revenue by that year. It could potentially maintain that growth rate if the macro environment improves, but any further slowdown in fiscal 2025 and beyond might force Snowflake to rein in those rosy expectations.

But its margins are still expanding

Snowflake faces a near-term slowdown, but its adjusted product gross margin and adjusted operating margin both expanded sequentially and year over year in the second quarter. Its adjusted free cash flow (FCF) also remains positive. It attributes that expansion to its improving scale, lower cloud hosting costs, and tighter cost controls. 

Data source: Snowflake. Non-GAAP figures..

Instead of executing layoffs to boost its margins, Snowflake actually hired roughly 1,000 new workers in fiscal 2023 and plans to hire an additional 1,000 new employees this year. That expansion implies Snowflake is still confident in its long-term growth potential, even as Amazon, Microsoft, and other cloud giants expand their data warehousing platforms.

For the full year, Snowflake expects its adjusted product gross margin to rise to 76%, its adjusted operating margin to stay flat at 5%, and for its adjusted FCF margin to expand to 26%. Analysts anticipate its adjusted EPS will climb 148%.

Is it the right time to buy Snowflake?

Snowflake is growing at a healthy rate and its profitability is improving. If it gradually reduces its stock-based compensation (which came out to 43% of revenue in the first half of fiscal 2024), it could eventually turn profitable on a GAAP basis.

But with a market capitalization of $49 billion, Snowflake still isn't cheap at 18 times this year's sales and more than 240 times its adjusted forward earnings estimates. Those high valuation multiples could limit its upside potential in this tough market until investors pivot toward growth stocks again. That said, Snowflake's annual product revenue could nearly quadruple over the next five years if it delivers on its long-term target, so it still has a clear path toward generating multibagger gains for investors who can tune out the near-term noise. If you fit that profile, then you should consider picking up some shares of Snowflake today.