Snowflake (NYSE: SNOW) posted its latest earnings report on May 22. For the first quarter of fiscal 2025, which ended on April 30, the cloud-based data warehousing company’s revenue rose 33% year over year to $829 million and surpassed analysts’ estimates by $43 million. However, its adjusted net income dipped 5% to $51 million, or $0.14 per share, and missed the consensus forecast by $0.03.

Snowflake’s stock slumped after that mixed report, and it’s already declined more than 20% this year as the Nasdaq advanced over 10%. Should contrarian investors buy the stock as the bulls turn the other way, or will it drop even further before it bottoms out?

Image source: Getty Images.

Why did the bulls give up on Snowflake?

Large organizations often store their data across different departments and computing platforms. That fragmentation often makes it difficult to make efficient data-driven decisions. Cloud-based data warehouses break down those silos by pulling all the data into a centralized location where it can be easily accessed by third-party applications.

Cloud infrastructure giants like Amazon Web Services (AWS) and Microsoft Azure also provide their own integrated data warehouses, but Snowflake’s service provides more flexibility by running across different cloud platforms. Snowflake also only charges usage-based fees instead of locking customers into sticky subscriptions.

Snowflake’s explosive growth rates initially attracted a stampede of bulls when it went public in September 2020. Its product revenue (which accounts for most of its top line) skyrocketed 120% in fiscal 2021 (which ended in January 2021) and surged another 106% in fiscal 2022. Its net revenue retention rate, which gauges its year-over-year growth per customer over the previous 12 months, rose from 168% in fiscal 2021 to 178% in fiscal 2022.

Snowflake’s stock rallied from its initial public offering (IPO) price of $120 to an all-time high of $401.89 on Nov. 16, 2021. At its peak, its enterprise value reached $119 billion — or 98 times the revenue it would actually generate in fiscal 2022. That frothy valuation, along with its lack of GAAP (generally accepted accounting principles) profits, made the company an easy target for the bears as rising rates, geopolitical conflicts, and other macro headwinds rattled the markets.

Is Snowflake’s growth stabilizing?

Those headwinds throttled Snowflake’s growth and popped its bubbly valuations. In fiscal 2023, its product revenue rose 70%, but its net revenue retention rate dipped to 158%. In fiscal 2024, product revenue grew 38% as its net revenue retention rate dropped to 131%. Over the past year, its sales growth stabilized, but its net revenue retention rate consistently declined.

Data source: Snowflake. YOY = Year over year.

However, Snowflake still isn’t anywhere close to breaking even on a GAAP basis, and non-GAAP margins seem to be peaking as the company ups spending on new data center GPUs for AI-driven applications. In the first quarter, its non-GAAP product gross margin stayed flat year over year at 77%, operating margin dipped by a percentage point to 4%, and its adjusted free-cash-flow (FCF) margin fell 2 percentage points to 44%.

Even as Snowflake racks up more losses, it continues to plow its cash into poorly timed buybacks. It bought back $516 million in shares in the first quarter — presumably to offset the dilution from its stock-based compensation expenses — even though its stock price declined more than 30% over the past three months.

What’s next for Snowflake?

Earlier this year, the abrupt resignation of CEO Frank Slootman, who had led Snowflake over the past five years, raised more red flags. Back in 2022, Slootman set a goal of generating $10 billion in product revenue by fiscal 2029.

But to hit that target now, the company would need to grow its annual product revenue at a compound annual growth rate (CAGR) of 30% from fiscal 2024 to fiscal 2029. Snowflake’s near-term outlook suggests it will miss that target. It expects product revenue to only rise 26%-27% year over year in the second quarter of fiscal 2025, while analysts expect total revenue to only increase 24% for the full year. From fiscal 2024 to fiscal 2027, analysts expect revenue to rise at a CAGR of 23%.

Snowflake blamed most of that slowdown on the macro headwinds, which caused many companies to rein in their cloud spending, but Snowflake’s declining retention rates indicate it’s struggling to squeeze more revenue from its existing customers.

It still looks pricey, relative to its growth potential

Based on analysts’ expectations and its enterprise value of $48 billion, Snowflake still isn’t a bargain at 14 times this year’s sales. That might be why its insiders sold about six times as many shares as they bought over the past 12 months.

Snowflake is still growing, but its slowing growth, declining retention rates, flattening margins, wasteful buybacks, and high valuations will all weigh down its stock. In short, investors shouldn’t consider this latest pullback to be a buying opportunity.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Microsoft, and Snowflake. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.