Snowflake (SNOW 3.69%) helps businesses extract more value from their data through its innovative Data Cloud. It was one of the hottest stocks when it went public in 2020, even attracting a small investment from Warren Buffett's Berkshire Hathaway.
While Snowflake stock still trades above its $120 IPO price, it's down 56% from the all-time high it reached in late 2021. The company is growing far more slowly today than it was a few years ago, and this slowdown is attributable to a few things.
First, Snowflake's business has matured so delivering lightning-fast growth is increasingly difficult. Second, the cloud computing company is grappling with macroeconomic challenges stemming from elevated inflation and interest rates, which have forced businesses to tighten their spending.
Snowflake generated $265 million of revenue in fiscal 2020, up 174% from the previous year, but that growth rate slowed to just 36% in fiscal 2024 (ended Jan. 31) as the top line cleared $2.8 billion. Wall Street's early forecast for fiscal 2025 points to a further deceleration.
Snowflake faces headwinds going forward
Despite launching a slate of artificial intelligence (AI) products last year to unlock new capabilities and enhance the user experience, Snowflake still faces challenges ahead. The company's longtime CEO Frank Slootman, who has been in the job since 2019, just stepped down. Transition periods sometimes create uncertainty for investors.
Plus, based on Snowflake's fiscal 2024 revenue of $2.8 billion and its current market capitalization of $58.5 billion, it trades at a price to sales (P/S) ratio of 21. That's extremely expensive relative to other cloud giants. Microsoft, for example, trades at a P/S ratio of 13, and Amazon stock trades at a P/S ratio of just 3.
The further Snowflake's revenue growth decelerates, the harder it will be to justify the company's valuation. The market appears to be in the process of adjusting its expectations for the stock -- and its share price -- so investors should tread with caution.
