Data cloud platform Snowflake (SNOW 3.69%) went public a few years ago and became arguably Wall Street's most expensive stock. Today, shares are still burning off its staggering valuation that peaked at a price-to-sales ratio (P/S) of more than 183. That's not earnings, that's sales.
Snowflake's share price has fallen over 50% from its all-time high, and the company's strong growth has further poured water on the valuation. Despite this, the stock is still expensive today.
I'll outline Snowflake's investment thesis below and discuss when buying the stock could make sense.
An integral product serving ever-growing needs
The global economy is steadily going through a technological revolution happening in the cloud -- massive data centers filled with remote servers. Instead of businesses storing data in individual, on-premise computer systems, it's kept at these data centers and accessed online.
Snowflake plays an essential role in the cloud world. It's a platform that enables companies to easily and securely store, access, analyze, and share their data. Snowflake is compatible with major cloud providers like Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud, and it integrates with many third-party apps.
Companies always create data, so computing and storage needs naturally increase over time. That's a built-in growth driver for Snowflake because it charges based on usage. This is reflected in the company's strong net revenue retention rate of 135%.
Cloud platforms have become significant businesses, generating over $200 billion annually across the three major providers. Yet, an estimated 59% of critical IT was still on-premise as of 2022. The cloud could overtake on-premise IT by 2025 and keep going. Snowflake has just under 9,000 customers today, a drop in the bucket to what's out there as businesses gradually adopt this technology. New customers coming on board and existing customers spending more could fuel years of revenue growth, a beautiful symphony.
Where Snowflake's valuation stands today
The glass could be half-full or half-empty, depending on how you view things. The half-full side of Snowflake is the stock has become far less expensive than it once was. Not only has its share price come down, but three years of solid growth have eaten away at its valuation.
Data by YCharts.
On the other hand, Snowflake is still a very expensive stock at these levels. At nearly 25 times sales, it's among the steepest P/S ratios on Wall Street. Things aren't any better if you value Snowflake on its earnings. The company is profitable, and analysts believe earnings per share (EPS) could grow at a swift 65% annual rate over the next three to five years.
But at a forward P/E of 268, that's a PEG ratio of more than 4, which signals the unfortunate reality that even Snowflake's strong growth doesn't justify buying shares at current prices.
Where might shares make more sense?
Unfortunately, great companies rarely go on sale, and there's no promise that Snowflake's valuation will get significantly better from here. But never say never. Ideally, a stock trades at a PEG ratio under 2, meaning that Snowflake's share price either falls dramatically, or the company's growth accelerates.
At the very least, it could take a broad market downturn to create the buying opportunity investors seek. Investors can always dollar-cost average into the stock as it approaches a valuation they're comfortable paying. The longer you intend to hold the stock, the better the chances Snowflake will grow into and beyond its valuation.
