Snowflake is in stage #1. The company reported earnings. The report was a 92% surprise (revenue was 2% surprise) but they provided guidance which Wall Street didn’t like. The stock dropped hard a week ago and all the Wall Street analysts started their piss contest on downgrading the stock. But last week, the stock rallied hard erasing all previous losses. I still think this company is unique providing an interesting solution to the cloud service and over time, it will be a big player on the market, similar to AWS, but better.

 

 

The company’s revenue is constantly growing at a nice pace of 48% of annual growth (65% two year’s growth). Looking at the consistent revenue growth, one would assume Wall Street would appreciate it. Apparently not.

 

 

The company’s free cash flow also improved and turned positive. Now it grows at 65% annual rate. If this trend continues in the near future, SNOW will become a cash cow.

 

 

EPS is still negative but growing at 32% annual growth.

 

 

The company has no (or negligible) debt and plenty of cash on hand:

 

 

SNOW shares outstanding were increasing at 3% annual rate diluting investors slightly. The two-year dilution was at a 5.5% rate. At this rate and stage of the business (the company is still too young), I do not think this is a big issue (compare it to Amazon in its infancy; they were diluting like crazy, and Wall Street went nuts about it).

 

 

With relatively impressive numbers, why is SNOW falling and struggling? The devil is in details. And SNOW’s growth may not seem as impressive when taking it under the microscope and when viewed next to recently reported growth rates. In the second, third, and fourth quarter of fiscal 2023 (the three quarters leading up to Snowflake’s most recently reported quarter), Snowflake’s product revenue growth rates were 84%, 83%, and 67%, respectively. The company’s 50% growth rate in its first quarter of fiscal 2024, therefore, marked a big step down. If this rapid deceleration in Snowflake’s growth continues, it could become extremely difficult to justify the company’s valuation. Add to it a cut to the full-year guidance and you will see why the stock crashed initially. But this is a typical behavior in the bear market, its recovery, and slowing economic cycle (which is also slowly turning back up, though).

In the recent conference call, a JP Morgan analyst asked if Amazon’s AWS can be a proxy to SNOW’s growth. SNOW’s CEO responded: “Yes. Well, we think that because Amazon is such a large percentage of our overall deployments that they are a good proxy. We just know from talking to them that what they experience, we experience as well… so the answer, generally speaking, is yes, we will see that. Microsoft is smaller so they are not as predictive or our experience as AWS would be.”

This gives a good guidance to what SNOW may see. And AMZN AWS growth was impressive but slowed too (the growth in 2021 was at 31%, 20% in Q1). So, it is slowing too and thus SNOW will be slowing as well. But is this something we should be worried about? As long-term investors, no. This is a typical economic cycle of slower growth. It will last a few months and then the cycle will turn around and grow faster again. But we will be buying during these slowdowns when companies are hated (namely tech stocks when the Wall Street predicts their ultimate end and bankruptcy-like, catastrophic future) and reap the gains when the cycle turns around and the short-sighted Wall Street starts chasing these stocks again.

On a fundamental basis, the stock is significantly overvalued, but it will catch up once the company matures over time. The stock fundamentals are impressive, but the stock is being punished by slowing growth and possibly high stock compensation that trumps all other otherwise outstanding metrics. I am still a believer in this company.
The stock is trending sideways, possibly creating a double bottom. It is trending in a box, and it may now bounce up to a $160-ish level. Let’s see if and when the stock successfully breaks above the sideways pattern.

 

 

 

The stock is now MODERATE BUY
 

This post was published in our newsletter to our subscribers on Sunday, June 4th, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.