Down 48% From Record Highs, Is Snowflake Stock Still Overvalued?

The ongoing sell-off in the equity market has dragged stock prices significantly lower in the last four months. Several growth stocks have fallen off a cliff after surging to record highs in 2021. One such cloud-based software-as-a-service company is Snowflake (NYSE: SNOW) which is down almost 50% from all-time highs, valuing it at $64 billion by market cap.

Snowflake offers a cloud-based data platform to enterprises in the U.S. and other international markets. The platform is called Data Cloud which is an ecosystem that allows customers to consolidate data and derive meaningful business insights as well as build data-driven products and services.

The bull case for Snowflake

In fiscal Q4 of 2022 that ended in January, Snowflake reported sales of $383.8 million and a loss of $0.43 per share. Comparatively, Wall Street forecast sales of $372.59 million and adjusted earnings of $0.03 per share. Snowflake’s revenue doubled year over year in fiscal Q4 of 2022. However, it was still lower than the 110% growth achieved in Q3 and 124% growth generated in 2022.

Snowflake ended fiscal 2022 with record consumption and bookings results. Its remaining performance obligations or RPO stood at $2.6 billion, an increase of 99% year over year. Comparatively, its net retention rate touched 178% which suggests existing customers increased spending on the Snowflake platform by 78% in Q4.

Snowflake continued to onboard clients at a rapid pace as it ended 2022 with 5,944 customers, up from 4,139 customers in fiscal 2021. While the company remains unprofitable, its operating loss narrowed to $152 million, compared to its prior-year loss of $200.4 million.

In Q4, Snowflake disclosed its intention to acquire Streamlit which is a framework built to accelerate the creation of data applications. Snowflake’s Co-Founder and President of Products Benoit Dageville said, "When Snowflake and Streamlit come together, we will be able to provide developers and data scientists with a single, powerful hub to discover and collaborate with data they can trust to build next generation data apps and shape the future of data science."

What next for SNOW stock and investors?

In the first quarter of fiscal 2023, Snowflake expects operating margins of negative 2%. The company forecast product sales to range between $383 million and $388 million in fiscal Q1 of 2023 and between $1.88 billion and $1.9 billion in fiscal 2023. The forecast represents a growth of around 66% year over year in fiscal 2023. We can see the massive earnings miss in Q4 and the deceleration in top-line growth is weighing heavily on SNOW stock.

The company forecast product gross margin of 74.5%, operating margin of 1%, and adjusted free cash flow margin of 15% in fiscal 2023. Its gross margin guidance includes performance improvements and investments as well as additional deployments at the global level.

In June 2021, Snowflake forecast product revenue to grow at an annual rate of 43.6% between fiscal 2021 and fiscal 2029. It suggests product sales will rise to $10 billion in fiscal 2029, up from $1.14 billion in fiscal 2022. The company expects to increase customers who generate $1 million in trailing 12-month sales to 1,400, up from just 184 customers at end of 2022.

SNOW stock remains expensive

At $210 per share, SNOW stock is valued at a price to forward 2023 sales multiple of 31x which is extremely frothy. While the company is estimated to end fiscal 2023, with adjusted earnings per share of more than 5,000x. We can see that the company will continue to reinvest its profits to expand its customer base, thereby sacrificing the bottom line.

SNOW stock continues to trade at a premium which suggests it remains extremely vulnerable if markets turn bearish. Its total number of weighted-average shares more than tripled in fiscal 2021 and rose by 122% in fiscal 2022. A key reason for the increase in share count is Snowflake has subsidized salaries with stock bonuses to conserve cash. So, expenses related to stock-based compensation rose over 100% in 2022 and accounted for 50% of total sales.

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