Is It Too Late to Buy Snowflake Stock?

Snowflake's (SNOW 3.69%) stock plunged 18% on Feb. 29 after the cloud-based data warehouse services provider followed up its strong earnings report with soft guidance and the abrupt resignation of its CEO, Frank Slootman.

For the fourth quarter of fiscal 2024, which ended on Jan. 31, Snowflake's revenue rose 32% year over year to $775 million and exceeded analysts' estimates by $14 million. Within that total, its product revenue increased 33% to $738 million. Its adjusted EPS jumped 150% to $0.35 and cleared the consensus forecast by $0.17.

Image source: Getty Images.

Snowflake's headline numbers looked healthy, but the company expects its product revenue to only rise 26% to 27% year over year in the first quarter of fiscal 2025, which would represent its slowest growth rate since its IPO. The departure of Slootman, who had led the company over the past five years, set off even more alarm bells.

So is it too late to buy Snowflake's stock, which now trades more than 50% below its all-time high from November 2021, as a long-term investment?

What does Snowflake do?

Large organizations often store their data on a wide range of computing platforms, and those fragmented silos can make it difficult to make efficient data-driven decisions. Snowflake breaks down those silos, pulls all of that data into its cloud-based warehouse, and makes it more accessible for third-party applications.

Snowflake hosts its platform on Amazon (AMZN 3.43%) Web Services, Microsoft (MSFT 1.82%) Azure, and other cloud infrastructure services. Those cloud giants also provide their own data warehousing services, but Snowflake is an appealing option for companies that don't want to lock themselves into a single cloud provider. Its usage-based plans, which only charge customers for the storage and computing power they use, are also more flexible than stickier subscriptions. The company also recently rolled out Snowflake Cortex, a platform that makes it easier to run generative AI applications.

Why did Snowflake's stock melt?

Snowflake's growth rates initially dazzled the bulls. Its product revenue soared 120% in fiscal 2021 (which ended in January 2021) and grew 106% in fiscal 2022. Its net revenue retention rate, which gauges its year-over-year growth per customer over the previous 12 months, climbed from 168% in fiscal 2021 to 178% in fiscal 2022.

In fiscal 2023, Snowflake's product revenue rose another 70%, but its net revenue retention rate slipped to 158%. In fiscal 2024, its product revenue only grew 38% to $2.67 billion as its net revenue retention rate dropped to 131%.

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

Like many of its cloud software peers, Snowflake attributed its slowdown to the macro headwinds that drove many companies to rein in their software spending. However, that deceleration could prevent Snowflake from reaching its goal of generating $10 billion in product revenue in fiscal 2029 -- which Slootman set during its investor day in June 2022.

To reach that target, Snowflake would need to grow its annual product revenue at a compound annual growth rate (CAGR) of 30% from fiscal 2024 to fiscal 2029. Unfortunately, its guidance for just 26% to 27% growth in the first quarter of fiscal 2025 dips below that threshold -- and suggests it could miss analysts' expectations for 30% growth for the full year. Its stock also still looks expensive at 17 times this year's revenue forecast.

During the fourth-quarter conference call, CFO Mike Scarpelli said: "Internally, we continue to march toward $10 billion in product revenue. Externally, we will not manage expectations to our previous targets until we have more data." That vague statement, along with Sridhar Ramaswamy's abrupt ascension to the CEO role, cast dark clouds over its future.

Its margins are still expanding -- but it's still unprofitable

On the bright side, Snowflake's adjusted product, operating, and free cash flow (FCF) margins all expanded significantly over the past year as it reined in its spending.

Data source: Snowflake.

But on a generally accepted accounting principles (GAAP) basis, its net loss still widened from $797 million in fiscal 2023 to $836 million in fiscal 2024. Its stock-based compensation (SBC) consumed a whopping 42% of its revenue for the full year.

On a non-GAAP basis, which generously excludes those SBC expenses, analysts expect its adjusted EPS to rise 16% in fiscal 2025. However, its stock still looks ridiculously expensive at 165 times that estimate.

Investors should wait for shares to revisit its IPO price

Snowflake still looks too expensive relative to its growth prospects, but it might be worth revisiting if it drops another 36% to its IPO price of $120. It's not too late to buy Snowflake's stock -- but I wouldn't touch it until its valuation gets a lot cheaper.