Snowflake Stock: Don’t Buy This Dip (NYSE:SNOW)

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 CrowdStrike

Snowflake stock price
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,

Investing 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

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.

CrowdStrike’s Revenue Growth Rates to Slow Down

Snowflake revenue growth rates

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 consensus beats

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 the industry it’s synonymous with ”sell”. And then, other analysts start to pick up on this fact, and they too update their models, as they don’t want to be left behind the curve.

This is a very roundabout way to say that the share price is down, therefore the share price is now worth less than it was a few months ago. If you believe that this is somewhat circular reasoning, it’s because it is.

But that’s the game. Don’t blame the game, just understand the rules, and get on board.

Thus, what’s the easiest angle to highlight right now?

Snowflake Q4 2022 non-GAAP operating income

Snowflake Q4 2022 investor presentation

That’s right, the fact that while the path to profitability is improving, it’s still a long time away until shareholders start to see a GAAP profit.

As you know well, much of Snowflake’s non-GAAP profits are made up of stock-based compensation, a non-cash expense.

But with the share price falling, the value of that stock-based compensation is similarly starting to decrease. Psychologically, that causes a lot of heartache for management. Previously, they were counting on that compensation and now they are seeing it dwindle.

That means that management needs to rapidly start to bolster their executive compensation package with actual cash, rather than just that ”funny” money, oftentimes called stock options.

SNOW Stock Valuation – Punchy

The problem with investing is that stocks don’t trade in a vacuum. What made sense to consider this time last year, isn’t the same as what makes sense in the current environment. The rules are always changing.

And right now, investors are starting to think to themselves, is it really worthwhile paying more than 27x forward sales for a business that may or may not reaccelerate its growth rates closer to 100% CAGR once again?

With the bull case made even more strenuous when the business is barely profitable, even on a non-GAAP basis?

The Bottom Line

In the article from two weeks ago, I said,

The odds of this investment look less than satisfactory. I believe that investors would do well to avoid buying more of this name.

Today I echo that stance. Investors should not buy this dip on the argument that everything will bounce back and be OK. It will not bounce back in the near term. It will not be OK. And in the long term, we’re all dead.

Altogether, I argue that there are much more compelling places to invest right now. Whatever you decide, good luck and happy investing.

Be the first to comment

Leave a Reply

Your email address will not be published.


*