Is Snowflake a Buy at $248?

Currently trading at $247.67, cloud services provider Snowflake (SNOW) has attracted significant investor attention lately because of its impressive revenue performance in its last reported quarter. However, given that the company's current valuation is not justified by its negative profit margin, can the stock keep rallying in the near term? Read on.

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The price of shares of Snowflake Inc. (SNOW), a cloud computing-based data platform operating in the United States and internationally, has risen 7.5% over the past month on investors' optimism over the company's triple-digit growth in product revenue in its last reported quarter.

However, SNOW's stock price has tumbled 12.2% year-to-date and 23.5% over the past six months. In fact, the stock closed yesterday's trading session at $247.67, 42.3% below its 52-week high of $429.

So, while the San Mateo, Calif. company's revenue growth remains strong, its net loss and operating loss have widened significantly in the first quarter of its fiscal year 2022. In addition to that, we think that in the highly competitive cloud-computing space, SNOW's lofty valuation and negative profit margin make its stock susceptible to a price pullback.

Click here to check out our Cloud Computing Industry Report for 2021

Here is what we think could influence SNOW's performance in the near term:

Tough Competition Can Mar Growth

The accelerated pace of digital transformation and the consequential transition to cloud computing has led to remarkably rapid growth of cloud computing and software giants such as Amazon.com, Inc. (AMZN), Microsoft Corporation (MSFT) and Alphabet Inc. (GOOG). Their broad range of cloud services and increasing investments in cloud infrastructure have enabled them to grow their market shares significantly over the years. Since these companies are providing cloud computing solutions at relatively cheaper rates than smaller companies like SNOW, it could negatively affect SNOW's business and make it difficult for the company to grow its market share and improve its profitability. Given SNOW's inadequate financials, this challenging landscape could be a threat to its growth prospects.

Bleak Financials

Although SNOW's product revenue increased 110% year-over-year to $213.8 million in its fiscal first quarter, ended April 30, 2021, the company's operating expenses surged 107.3% from their year-ago value to $337.16 million, primarily because of an increase in general and administrative expenses. Also, the company reported a $205.6 million loss from operations, representing a 113.3% increase year-over-year. Furthermore, its net loss came in at $203.22 million for this period. This compares to a $93.64 million net loss in its fiscal first quarter of 2021. Its loss per share came in at $0.70 during this period.

The company's 0.2% trailing-12-month asset turnover ratio is 69.6% lower than the 0.6% industry average. And its trailing-12-month ROE, ROA and ROTC are negative 29.8%, 10.9% and 13.2%, respectively. SNOW's trailing-12-month cash from operations stands at negative $16.97 million. Furthermore, the company's trailing-12-month EBITDA and net income margins are negative 89.9% and 91.1%, respectively, indicating inefficient operations.

Sky-High Valuation

In terms of forward EV/Sales, SNOW is currently trading at 95.85x, which is 1,934.9% higher than the 4.71x industry average. Its 65.63 forward Price/Sales multiple is significantly higher than the 4.07 industry average. Also, SNOW's 14.74 trailing-12-month Price-to-Book ratio is 191.1% higher than the 5.06x industry average. Also, the company's 1,576.63 forward Price/Cash flow multiple is significantly higher than the 23.34 industry average.

Unfavorable POWR Ratings

SNOW has an overall F rating, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by 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 grade for Growth and Quality. The stock's inadequate financials and low profitability are reflected in these grades.

Also, it has an F grade for Value, which is consistent with the stock's premium valuation.

Beyond the grades we've highlighted, one can check out additional SNOW ratings for Sentiment, Stability, and Momentum here.

SNOW is ranked #71 of 73 stocks in the D-rated Technology – Services industry.

There are several top-rated stocks in the same industry. Click here to view them.

Bottom Line

Even though SNOW has gained significant investor attention lately because of its high net revenue retention rate and strong product revenue growth, it may not be able to grow amid tough competition unless it is able to reduce its operational losses and expenses. The company may face a bumpy path to profitability because the growing dominance of cloud computing giants continues to pose a threat. Given its stretched valuation, we believe it's wise to avoid the stock now.

Click here to check out our Cloud Computing Industry Report for 2021

SNOW shares rose $0.13 (+0.05%) in premarket trading Tuesday. Year-to-date, SNOW has declined -11.94%, versus a 15.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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