Investors Waiting For the “Buy” Signal in Snowflake Stock

Stock Market
  • Snowflake (NYSE:SNOW) stock now sells for less than on the day of its IPO.
  • The company continues to grow and innovate despite the sharp sell-off in shares.
  • It may not be time to buy SNOW stock yet, but the time will come.
Source: Sundry Photography / Shutterstock.com

Data warehousing company Snowflake (NYSE:SNOW) is down nearly 60% in 2022 following the tech sector crash. Yet, analysts keep pounding the table for SNOW stock. Of 24 analysts listed at TipRanks, 15 still rate shares a “buy.” Just one wants you to sell. Their average price target is north of $291, meaning they expect shares to more than double over the next year.

But SNOW stock still isn’t cheap. It has a market cap of $44.5 billion, even after reporting revenue of just $1.14 billion for its fiscal year ending in January.  To its credit, that was double the previous year’s total. And managment anticipates fiscal 2023 revenue of about $1.9 billion.

Currently, SNOW stock is trading at a price well below that of its market debut in September 2020.

SNOW Snowflake $141.56

Snowflake Reset

I wrote positively about Snowflake just two weeks ago.

I noted it has positive operating cash flow and plenty of cash. It is known for its Data Cloud, which combines cloud-sized data storage and analysis. Its primary competitor is Amazon (NASDAQ:AMZN) Redshift. This makes the two companies frenemies since Snowflake doesn’t own its own cloud data centers.

Snowflake is only technically based in Bozeman, Mt. That’s the home of Frank Slootman, CEO since 2019. Snowflake is a Silicon Valley company that chose during the pandemic to let its employees work from home.

The chart for SNOW stock is like a pandemic-era EKG. Shares have traded as high as $400 on two separate occasions — in December 2020 and November 2021. Today, shares sit 42% below their first trade at $245 and only 12.3% above their all-time low, made earlier this month.

It’s clear Snowflake was caught up in the broader tech wreck that decimated high-multiple stocks. The fact that Salesforce (NYSE:CRM), which put $250 million into Snowflake’s IPO, sold the majority of its stake in the first quarter didn’t help.

Why Are Analysts So Confident in SNOW Stock?

SNOW stock is down 24% in the past month alone. Yet, analysts remain confident in Snowflake because they’re seeing past the current economic situation and looking toward another tech rebound. They’re calling Snowflake a bargain.

At some point, they are bound to be right. It’s the market that’s broken, not Snowflake. The company is doing great, growing like a weed and fulfilling its promises.

Analysts see it turning its data management into a platform that lets slow-moving businesses speed up by moving data into Snowflake and analyzing it there. This avoids the whole “public or hybrid” cloud debate. They let Snowflake arbitrage those costs and simply pay for the data they consume.

Bears like InvestorPlace’s Chris Tyler say Snowflake isn’t unique and shares could fall further. Tyler notes that it competes with Microsoft (NASDAQ:MSFT), as well as Amazon, and that it’s still selling at an unsustainable price-to-sales ratio.

Bulls like InvestorPlace’s David Moadel say SNOW stock is oversold, with performance obligations worth $2.6 billion in the fourth quarter of 2021. Moadel cites the launch of Snowflake’s Retail Data Cloud project and Healthcare & Life Sciences Data Cloud as growth opportunities. The retail and health care industries have huge technology debt and gain productivity from having their data analyzed outside various silos and fiefdoms.

The Bottom Line on SNOW Stock

Technology leads the economy into a recession. Technology also leads the way out of a recession.

This has been the pattern ever since I began reporting on tech in 1982. Technology creates deflation, in the form of productivity and savings. But tech valuations often run away from fundamentals, leading to periods of sharp declines as we’ve seen.

When and where you buy Snowflake depends on your view of how bad the current economy is. My view is that it’s not that bad and that technology like Snowflake’s can help address its problems.

The only issue is valuing that benefit. Buying anything trading for 30 times revenue looks like a bad bet when so many money-making tech companies are selling at deep discounts.

That tells me you should wait for a recovery in Snowflake’s suppliers, the Cloud Czars, before calling a bottom in it. Once the value of tech earnings goes up, the value of tech growth will follow. That hasn’t happened yet.

On the date of publication, Dana Blankenhorn held a long position in AMZN, CRM and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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