SNOW: Is Snowflake Stock a Buy Right Now?

Tech investors have lost significant wealth in the first five months of 2022. It doesn’t matter what company you are looking at as most of them have taken a beating this year. But the pullback offers a great opportunity to buy fundamentally good stocks at great bargains. One such stock is Snowflake (NYSE: SNOW) which has declined over 60% year to date and is well poised to stage an impressive comeback once market sentiment improves. 

Snowflake is often described as a cloud-based company that provides data warehousing services. Basically, the company provides tools and analytics to manage day-to-day operations. These services are cloud-agnostic and can be integrated with Amazon Web Services (NASDAQ: AMZN) and Microsoft Azure (NASDAQ: MSFT). 

Around two-fifths of Fortune 500 companies use Snowflake’s cloud software. It has successfully attracted big-ticket clients across industries that include healthcare, financial services, media, and retail among others.  

A look at Snowflake’s Q1 earnings 

Snowflake recently announced its results for fiscal Q1 of 2023 (ended in April). Its product revenue grew 84% year over year to $394.4 million. The company ended Q1 with 6,322 customers with a net revenue retention rate of 174%. It indicates that existing customers increased spending on the Snowflake platform by an impressive 74% in Q1, compared to the year-ago period. 

The company has 206 customers with a trailing 12-month product revenue greater than $1 million. Snowflake also said that it had $2.6 billion worth of remaining performance obligations, up 82% year-on-year.  Total revenue was $422.4 million in Q1 of 2023. 

Snowflake claimed it expects product revenue growth in the 71-73% range for the second quarter of FY’23 while it might increase between 65% and 67% for fiscal 2023.  Additionally, Snowflake emphasized that certain customer segments are slowing down which might lower the spending capacity of enterprises part of multiple sectors.  

Analysts are disappointed with SNOW stock

Snowflake’s Q1 numbers beat market estimates but the stock fell as its guidance was lower than expected.

In a note, JPMorgan (NYSE: JPM) analyst Mark Murphy, said, “Snowflake's Q1 product revenue growth reflected a slowing of consumption patterns on macro headwinds in April, which impacted activity among specific high-growth customers due to a pull-forward of demand in the prior year.” He added, “However, despite the near-term drag on revenue upside, we remain impressed by the company's robust free cash flow generation and long-term growth trajectory at scale.”

The fact that tech stocks are going through a tough time can’t be denied. UBS analyst Karl Keirstead said, “The fact that Snowflake – with one of the strongest fundamental stories in tech – is seeing some early macro weakness (even if only in a narrow pocket of customers) is a negative read-through to other tech firms with similar exposures.”

Snowflake is one of the highest valued stocks in the cloud computing space. It trades at over 20x forward revenue. The company has just turned profitable on an adjusted GAAP (generally accepted accounting principles) basis. However, it needs to turn GAAP profitable. Even a slight downward deviation compared to its guidance or market expectations has severe repercussions for the stock. 

The company is on track to hit $1.8 billion to $1.9 billion in revenue by the end of FY23. Snowflake has said that it aims to touch $9 billion in revenue by 2029. The company’s fundamentals are rock solid and with demand for cloud continuing to grow, there’s no reason why it can’t hit those numbers.

Snowflake closed on May 27 at $129.91. The average analyst 12-month target price for the stock is $225.38. That’s a potential upside of over 73%. It’s a great business and is facing some downturn now. But when markets turn in favor of tech stocks again, Snowflake might just snowball into a giant monster.

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