Snowflake Stock: Don’t Buy This Dip (NYSE: SNOW)
Snowflake (SNOW) remains a favorite among investors, with its very compelling narrative around its strong moat. That being said, I would argue that investors shouldn’t be too eager to buy this dip.
There are enough clues to warrant that investors would do well to watch beyond its beautifully crafted PR campaign and focus on the fact that paying $55 billion for this investment does not provide investors with a compelling risk-reward profile. Here’s why:
Investor sentiment turns negative for CrowdStrike
The past 3 months have been difficult for Snowflake investors. As you can see above, over the past 90 days, Snowflake has lost around 50% of its market capitalization.
In this sense, I said two weeks ago,
IInvesting is never easy and investing is never easy. You are always working on incomplete information as an outsider trying to make the best possible investment decision with the conflicting available information that gives you a wide margin of safety.
I don’t see how Snowflake provides investors with enough of a margin of safety. And I know that investors would much rather stand behind the “buy and hold forever” mantra than reevaluate their investment thesis.
But now you have a clear choice:
- You can either reevaluate your choice now.
- Or you can do it much later at a lower valuation.
Similarly, at the end of August, long before Snowflake’s valuation began to reflect its negative momentum, I said:
[A]t about 42x next year’s earnings, for new shareholders it’s hard to get very excited here.
Since my August post, the stock is down 40%.
Still, to be honest, it wasn’t that I had a crystal ball. I absolutely did not. But I saw enough then, as I can see now, that this investment will not end well at a market cap of $55 billion.
CrowdStrike revenue growth rates will slow
Snowflake’s fiscal 2023 revenue shows 67% year-over-year growth. That being said, obviously management is cautious in its guidance. Also, keep in mind that this guide only looks at its product revenue, it doesn’t include its unprofitable professional services segment.
Also, as I said two weeks ago, and I will say it again now, the forecast for the professional services segment is not where the bullish case is.
Additionally, as you can see above, Snowflake’s fourth quarter of 2022 only exceeded revenue estimates by less than 3%. Therefore, this is a clear departure from the strong beats of previous quarters, where Snowflake beat estimates in the mid to high numbers.
Why snowflake? Why now?
Snowflake is a data-connected cloud platform. The more customers and data providers upload data to it, the more valuable the Snowflake Data Cloud becomes.
Meanwhile, Snowflake breaks down data silos so customers can build data-driven applications with that data. Snowflake enables companies to store and analyze massive amounts of data.
Snowflake operates from a single platform, enabling enterprises to securely embrace the elasticity of the cloud to drive data insights with massive scalability across any workload.
Path to Profitability: Keeping Up
Here’s the thing, when the stock price is going up or on a sideways trajectory, no one is going to ask hard questions about their investment. Everybody is happy.
But when the stock price starts falling, the buy side starts calling the sell side, asking why the stock price is down?
Additionally, the buy side is beginning to wonder why some financial analysts are selling the stock at a “buy” rating, when the stock is down?
And for a little while the sell side will push back with ”no response” but after a few more weeks analysts believe they need to update their financial models to reflect the newly found ”reality”.
And they’re starting to issue recommendations to “hold,” which in the industry is synonymous with “sell.” And then other analysts start to realize that fact, and they too update their models, because they don’t want to be left behind the curve.
That’s a very roundabout way of saying the stock price is down, so the stock price is now worth less than a few months ago. If you think this is somewhat circular reasoning, that’s because it is.
But that’s the game. Don’t blame the game, just understand the rules and get on board.
So what’s the easiest angle to highlight right now?
That’s right, the fact that even if the path to profitability improves, there’s still a long time before shareholders start seeing GAAP earnings.
As you well know, a large portion of Snowflake’s non-GAAP earnings are stock-based compensation, a non-cash expense.
But as the stock price falls, the value of this stock-based compensation also begins to decline. Psychologically, this causes the management a lot of grief. Previously, they counted on this compensation and now they see it diminishing.
That means management needs to quickly start bolstering its executive compensation package with real money, rather than the “fun” money, often referred to as stock options.
SNOW Stock Valuation – Punchy
The problem with investing is that stocks don’t trade in a vacuum. What made sense to consider at this time last year is not the same as what makes sense in today’s environment. The rules are constantly changing.
And right now, investors are starting to wonder if it’s really worth paying more than 27x forward sales for a company that may or may not reaccelerate its growth rates closer to 100% CAGR once again. ?
The bullish case being even tougher when the company is barely profitable, even on a non-GAAP basis?
In the article two weeks ago, I said,
The chances of this investment seem less than satisfactory. I believe investors would do well to avoid buying more of this name.
Today, I share this position. Investors shouldn’t buy this dip thinking everything will bounce back and work out. It will not rebound in the short term. It won’t be OK. And in the long run, we’re all dead.
All in all, I argue that there are far more attractive places to invest right now. Whatever you decide, good luck and good investment.