Cloud computing company stock Snowflake (SNOW 1.75%) have worsened, falling almost 49% since the beginning of the year. This has been the general pattern for high-growth tech stocks as they face immense pressure from inflation and combative interest rate hikes from the Federal Reserve.
Snowflake, which enables data storage, processing and analytics solutions, is in a unique position in the data storage market, with a current 19.3% share of the industry, according to data from Slintel.
Valued at $4.7 billion in 2021, the cloud data storage market is forecast to grow at a compound annual growth rate (CAGR) of 22.3% through 2026, to $12.9 billion. According to the company’s estimates, its total addressable market in all business areas such as data storage, data lake, cyber security, data engineering, etc. is equal to $248 billion. With this in mind, it is clear that Snowflake enjoys a long history of growth in the coming years. So have short-term headwinds caused investors to lose sight of the company’s long-term trajectory? Is now a good time to buy stocks? Let’s take a look at the cloud company’s current situation to determine if it’s a sensible purchase right now.
Snowflake’s business continues to move forward
The company delivered a strong second-quarter earnings report in late August, prompting a short-lived surge in its share price. Its total revenue increased 82.7% year over year to $497.2 million and it generated a net loss of $222.8 million, equal to a negative $0.70 per share. The company’s total customers increased 36.3% to 6,808, and its customers who contributed $1 million or more in revenue soared 112% to 246. And it’s obvious that its customers are satisfied: the retention rate of Snowflake’s net income has fluctuated between 169% and 175% over the past five quarters. A good earnings retention rate is usually 100% or higher, so in this case, the company is way ahead of the curve.
This year, Wall Street analysts forecast the company’s total revenue to rise 67.4% to $2.04 billion and its adjusted earnings per share to end at $0.16, a notable increase from $0.01. last year’s dollars. Next year, analysts expect its top line to expand another 51.6% to $3.10 billion and its earnings per share to rise to $0.46. Please note that those earnings per share forecasts are non-GAAP or adjusted estimates. Based on generally accepted accounting principles (GAAP), Snowflake remains underperforming, making it a risky investment in the future. As of the six months ended July 31, the company has suffered a GAAP net loss of $388.6 million. As competition from well-funded tech giants like Alphabet Y Amazon escalates, there is no guarantee that Snowflake will ever operate a consistently profitable business.
Despite its ongoing sell-off, the stock still has a selling price multiple of around 32.3. That is a very high price to pay for an unprofitable business that is expected to reverse top-line growth in the next two years. But is Snowflake underrated as we look to the future? Assume the company can generate $6.6 billion in annual sales for its fiscal year 2026, implying a CAGR of approximately 40% beginning in fiscal year 2022. At that point, it is unlikely to sustain such a high price-sales multiple as growth slows from existing levels. If we were to cut its current multiple in half to 16, assuming $6.6 billion in sales, the company’s market cap would dwarf $105 billion for its fiscal year 2026, which is a 93% increase over market cap. current $54.3 billion.
Should Investors Buy Snowflake Stock?
Investors should consider two key components before investing in Snowflake stock today: its lack of profitability and its high valuation. These two elements surely make the company a risky investment, especially in the current market environment. That said, the company continues to expand its top lineup at an impressive rate, and its long-term growth picture is promising. If I had to place my chips on one side, I’d bet Snowflake ends up a secular winner going forward. I believe the company will eventually achieve profitability and grow to its very high valuation. And after its recent pullback, today it may be a good entry point for patient long-term investors.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. lucas meindl has no position in any of the mentioned stocks. The Motley Fool holds positions in and recommends Alphabet (A-shares), Alphabet (C-shares), Amazon, and Snowflake Inc. The Motley Fool has a disclosure policy.