Snowflake Stock: Don’t Buy This Dip

Snowflake Stock: Don't Buy This Dip


Snowflake’s share price has started to fall as investors start to question whether it’s worthwhile paying such a high multiple.

Snowflake’s slowing revenue growth rates are just one problem. The other problem is that investors no longer embrace ”investing for growth at any cost” strategies.

There’s a lot of noise in the market right now. So I’ll make it clear, the investment in SNOW stock is not going to turn out rosy.

I highlight what investors should think about with Snowflake.

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Sundry Photography/iStock Editorial via Getty Images Investment Thesis

Snowflake ( SNOW ) remains a crowd favorite amongst investors, with its very highly compelling narrative around its strong moat. That being said, I contend that investors should not be too eager to buy this dip.

There are enough indications to justify that investors would do well to look beyond its beautifully crafted PR spin campaign and focus on the fact that paying $55 billion for this investment doesn’t offer investors a compelling risk-reward profile. Here’s why: Investor Sentiment Turns Negative For Snowflake

Data by YCharts The past 3 months have been tough for Snowflake investors. As you can see above, in the past 90 days, Snowflake lost approximately 50% of its market cap valuation.

Along these lines, I said two weeks ago , I nvesting is never easy and investing is never obvious. You are always working off incomplete information as an outsider attempting to make the best investment decision you can with the information available at odds that leave with you an ample margin of safety. I fail to see how Snowflake offers investors enough margin of safety. And I know that investors would much rather stand behind the mantra of ”buy and hold forever” rather than reassess their investment thesis. But you are left with a clear choice now: You can either reassess your choice now.

Or you can do it much later at a lower valuation.

Similarly, at the end of August , way before Snowflake’s valuation started to reflect its negative momentum I said, [A]t approximately 42x next year’s revenues, for new shareholders, it’s difficult to get very excited here. Author coverage of SNOW Since my August article, the stock is down 40%.

Yet, to be honest, it’s not that I had a crystal ball. I absolutely did not. But I could see enough then, as I can now, that this investment isn’t going to end well at a $55 billion market cap. Snowflake’s Revenue Growth Rates to Slow Down

Snowflake revenue growth rates Snowflake’s fiscal 2023 revenues point to 67% y/y growth. That being said, obviously, management is being conservative with its guidance. Also, remember that this guide is only for its product revenues, it doesn’t include its unprofitable professional services segment.

Further, as I said two weeks ago , and repeat now, forecasting the professional services segment is not where the bull case lies. Snowflake’s consensus beats What’s more, as you can see above, Snowflake’s Q4 2022 only beat revenue estimates by less than 3%. Hence, this is a clear departure from the solid beats in its prior quarters, where Snowflake was beating estimates in the mid-to-high single digits. Why Snowflake? Why Now?

Snowflake is a cloud-based data-connected platform. The more that customers and data providers upload data to it, the more valuable Snowflake’s Data Cloud becomes.

Meanwhile, Snowflake breaks down the data siloes so that customers can build data-driven applications with that data. Snowflake allows companies to store and analyze enormous amounts of data.

Snowflake works off a single platform, allowing companies to securely embrace the elasticity of the cloud to drive data insights with tremendous scalability through any workload. Path to Profitability: Keeping Up With the Times Here’s the thing, when the share price is going up or tracking sideways, nobody is going to ask difficult questions about their investment. Everyone is happy.But when the share price starts to fall, the buy-side starts to call around to the sell side, asking why is the share price down?What’s more, the buy-side starts to question why certain financial analysts are selling the stocks with a ”buy-rating”, when the stock is falling?And for a little while, the sell-side will push back with ”none answers”, but after a few more weeks, analysts feel that they must update their financial models to reflect the newly found ”reality”.And they start to issue ”hold” recommendations, which in […]

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