Snowflake Inc. (SNOW) operates a cloud-based data platform in the United States and globally. The company's platform includes a Data Cloud, enabling companies to consolidate data into a single source of truth to deliver valuable business insights, construct data-driven apps, and share data. Its platform is used by various businesses of varying sizes and sectors.
The company’s shares are down 49.2% over the past year and 63.8% year-to-date to close its last trading session at $122.54. In addition, the stock is currently trading 69.7% below its 52-week high of $405, which it hit on November 17, 2021.
Last month, the company reported fiscal 2023 first-quarter earnings that exceeded analyst sales projections, but its forecast for operating income for the upcoming quarter was lower than expected. According to the company, consumption will be impacted by macroeconomic headwinds. Product revenue is expected to be $435 million to $440 million in the current year, representing a 71 percent to 73 percent increase over the prior year – the slowest since Snowflake went public in 2020. Product sales account for more than 90% of SNOW's total revenue.
Here's what could shape SNOW's performance in the near term:
Negative Profit Margins
SNOW's trailing-12-month asset turnover ratio of 0.22% is 65.8% lower than the industry average of 0.64%. Also, its trailing-12-month ROA, ROC, and net income margin are negative 9.2%, 8%, and 45.5%, respectively. Moreover, its trailing-12-month EBITDA margin stood at a negative 47.4% compared to its industry average of 13.31%.
Premium Valuation
In terms of forward non-GAAP P/E, the stock is currently trading at 772.47x, 4462.87% higher than the industry average of 16.93x. Also, its forward EV/Sales of 15.41x is 483.9% higher than the industry average of 2.64x. Furthermore, SNOW’s forward Price/Sales of 17.88x is 591.7% higher than the industry average of 2.59x.
POWR Ratings Reflect Bleak Outlook
SNOW has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. SNOW has a D for Value and Quality. The stock's higher-than-valuations are in sync with the Value grade. In addition, the company's poor profitability is consistent with the Quality grade.
Of the 82 stocks in the C-rated Technology – Services industry, SNOW is ranked #76.
Beyond what I've stated above, you can view SNOW ratings for Stability, Growth, Momentum, and Sentiment here.
Bottom Line
SNOW is primed for long-term growth, but its outlook for the upcoming quarters and low-profit margins are cause for concern. Furthermore, there appears to be a misalignment between its premium valuation and underlying fundamentals. Moreover, the stock is currently trading below its 50-day and 200-day moving averages of $159.97 and $268.42, respectively, indicating bearish sentiment. So, we think the stock is best avoided now.
How Does Snowflake Inc. (SNOW) Stack Up Against its Peers?
While SNOW has an overall D rating, one might want to consider its industry peers, Information Services Group Inc. (III), NTT Data Corporation (NTDTY), and Computer Task Group Incorporated (CTG), which have an overall A (Strong Buy) rating.
SNOW shares were trading at $114.49 per share on Thursday afternoon, down $8.05 (-6.57%). Year-to-date, SNOW has declined -66.20%, versus a -22.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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