Though shares of data cloud specialist Snowflake (SNOW 3.69%) have fared well this year, rising more than 15% of this writing, many investors holding shares for longer time horizons are still beaten down. For instance, the growth stock is down more than 50% since the beginning of 2022.
This begs the question: What will it take for this stock to really take off again? While no one can know for sure what will send shares higher, here's one thing that could help: Snowflake's rapidly decelerating top-line growth rates need to stabilize or even start accelerating again.
Sure, investors can forgive Snowflake for reporting decelerating growth since its initial public offering in late 2020. The triple-digit growth rates the company was posting in 2020 and 2021 were obviously unsustainable. But with year-over-year revenue growth rates now in the 30s (and still decelerating), some investors may be starting to look at the stock more skeptically -- particularly in light of its premium valuation.
Decelerating growth
The deceleration in Snowflake's revenue growth rates has been severe. Starting with the company's quarter ended Oct. 31, 2021 (Snowflake's third quarter of fiscal 2023), the tech company reported a year-over-year revenue growth rate of 67% -- well below the triple-digit growth it was serving up investors a few years earlier, but still impressive.
But things have deteriorated quickly over the past 12 months. Growth decelerated to 53% the next quarter, and then to 48% and 36% in the first and second quarters of fiscal 2024, respectively.
What can we expect from fiscal Q3? Probably another big deceleration, based on management's guidance for product revenue (the majority of Snowflake's total revenue) to grow 28% to 29% year over year, down from 37% growth in fiscal Q2.
Signs of stabilization
With such a big pullback in revenue growth rates and management's guidance for further deceleration in fiscal Q3, investors will be watching top-line trends and management's financial guidance closely in the coming quarters.
Fortunately, there have been some signs of stabilization in Snowflake's business, even if they haven't shown up in reported revenue yet. Snowflake chief financial officer Michael Scarpelli said in the company's fiscal second-quarter earnings call that, in terms of the bookings it is seeing from its customers, the company has seen "promising signs of stabilization, with new bookings outperforming expectations."
But given how uncertain the current operating environment is, it's always possible that this stabilization was short-lived. To see whether this was the case, investors can look to management's commentary in its earnings report next Wednesday.
Valuation ups the ante
For many stocks, revenue growth rates in the 30s or even 20s wouldn't be a problem. But we're talking about one of the growth stocks of all growth stocks. Snowflake sports a market capitalization of over $50 billion, even though it isn't profitable yet. This premium valuation means investors demand exceptionally strong growth from this company for years to come. If Snowflake's trend of decelerating top-line growth doesn't moderate soon, investors may have to revisit their thesis.
After all, Snowflake has been telling investors since its initial public offering that it expects to get to $10 billion in annual revenue by fiscal 2029 (up from the $2.75 billion the consensus analyst forecast calls for in fiscal 2024). If growth rates come down too much, investors may stop believing this long-term target is possible.
