Is It Too Late to Buy Snowflake Stock?

Snowflake's (SNOW 3.69%) stock jumped 7% on Thursday after the cloud-based data warehouse provider posted its latest earnings report. For its fiscal 2024 third quarter, which ended on Oct. 31, revenue rose 32% year over year to $734 million, beating analysts' consensus estimate by $21 million. Its adjusted net income surged 134% to $90 million, or $0.25 per share, clearing the consensus forecast by $0.09 per share.

Those growth rates seem healthy, but is it too late to buy Snowflake's stock after its 30% rally over the past 12 months?

Image source: Getty Images.

Why the bulls initially fell in love with Snowflake

Snowflake pulls all of an organization's data onto its centralized cloud-based data warehouse platform so it can be easily accessed by third-party applications. That approach breaks down the silos between different business divisions and computing platforms, making it easier to make efficient data-driven decisions.

When Snowflake went public three years ago, it gained a lot of attention for its explosive growth rates. Its product revenue (which accounted for most of its top line) surged by 120% in its fiscal 2021 (which ended in January 2021) and 106% in its fiscal 2022. Its net revenue retention rate, which gauges its year-over-year revenue growth per established customer over the previous 12 months, jumped from 168% in fiscal 2021 to 178% in fiscal 2022.

Metrics like these propelled Snowflake's stock from its IPO price of $120 to $245 on its very first trading day, and eventually to its all-time high of $401.89 on Nov. 16, 2021. At its peak, the company's market cap hit $123 billion -- which was more than 100 times the revenue it would generate in fiscal 2022.

Its high valuation set it up for a steep decline

But in fiscal 2023, its product revenue only rose 70% and its net revenue retention rate dipped to 158%. Those numbers were still impressive, but macroeconomic headwinds have significantly throttled its revenue growth and net revenue retention rates over the past year.

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

Management expects that slowdown to continue, guiding for product revenue to rise by 29% to 30% in the fourth quarter and by 37% to $2.65 billion for the fiscal year. That deceleration is disappointing, but the company still says it expects to hit its long-term target of generating $10 billion in product revenue in fiscal 2029. To do that, it would need to grow at a compound annual rate of 30% from fiscal 2024 to fiscal 2029 -- something that still seems realistic if the macro environment warms up and the cloud market stabilizes.

During the Q3 conference call, CFO Mike Scarpelli said Snowflake "saw strong consumption from a broad base of customers" in the quarter and its "largest customers stabilized as expected." CEO Dan Slootman also described the macro environment as "broadly stabilizing," and said that Snowflake was "well positioned" to profit from the expansion of the artificial intelligence (AI) market as its clients fed more data into AI-driven applications.

However, rising interest rates over the past two years took some air out of Snowflake's bubbly valuations. It now trades at $186 per share, with a market cap of $58 billion -- but it still can't be considered a bargain at 21 times its projected sales for fiscal 2024.

Another quarter of expanding margins

Snowflake's revenue growth is cooling off, but its margins are still expanding. Its adjusted gross margin improved from 69% in fiscal 2021 to 75% in fiscal 2023, which indicates it has plenty of pricing power in the data warehousing market. Its adjusted operating margin also turned positive in fiscal 2023, while its adjusted free-cash-flow (FCF) margin has stayed positive since fiscal 2022. Those expansions continued in the third quarter with all three metrics growing year over year.

Data source: Snowflake. Non-GAAP basis.

But on a generally accepted accounting principles (GAAP) basis, Snowflake's net loss still widened year over year from $590 million to $668 million in the first nine months of fiscal 2024. Most of that loss can be attributed to its stock-based compensation expenses, which consumed a whopping 42% of its revenue during those three quarters -- but it will likely remain unprofitable on a GAAP basis for the foreseeable future.

Is it too late to buy Snowflake's stock?

Snowflake's growth is stabilizing, and management sees brighter days ahead, but its rich valuation and red ink will limit its upside potential as long as interest rates stay elevated. Its shares bounced back during the broader tech rebound of the past year, but they remain well below their peak. It's not too late to buy Snowflake as a long-term investment if you believe the company can achieve its growth targets for fiscal 2029, but you should temper your near-term expectations for this volatile stock.