Few could have foreseen the rapid rally of the stock market in 2024, with the S&P 500 surpassing 5,000. However, after several fervent months, especially for growth and tech stocks, now is the time to review our portfolios and consider necessary adjustments.
Snowflake (NYSE:SNOW) has significantly benefited from the recent resurgence of risk appetite. The data warehousing company has surged more than 25% year to date, aligning with other software, particularly AI names, despite no new driving forces of its own.
The Recent Rally: Time to Cash In?
While I previously expressed bullish sentiments toward Snowflake in October, when the stock was trading around $150 per share, the current situation prompts a different outlook. With Snowflake having exceeded my price target, I’ve decided to offload my stake and adopt a neutral position on the company. At current share prices, there are both positive and negative aspects to consider.
- Secular Tailwinds and Large TAM: Snowflake benefits from trends in cloud adoption and data volume growth, with a vast Total Addressable Market (TAM) that presents substantial untapped potential.
- Consumption Model and Valuation Concerns: Snowflake’s revenue model and its current valuation, especially with an enterprise value of $73.75 billion and a revenue multiple of 20.3x EV/FY25, raise red flags.
The next potential catalyst for Snowflake is its fiscal Q4 earnings release, expected on February 28. However, the hype surrounding the stock at its current levels suggests a “buy the rumor, sell the news” scenario. It may be wise to take profits now and consider re-entry in the $200-$210 range.
Q3 Performance Indicates Risks
Analysis of Snowflake’s Q3 results has uncovered fundamental risks that could affect the company’s ability to maintain a ~20x revenue multiple. Revenue deceleration, weakening net revenue retention rates, and slower growth in Remaining Performance Obligations (RPO) are significant concerns. Snowflake’s management acknowledges stabilized consumption trends and anticipates further tailwinds from AI initiatives, but the risks loom large.
Final Thoughts
With Snowflake trading at an approximate 20x FY25 revenue multiple, expecting further upside from this point might be overly optimistic. Unless there is a substantial acceleration in consumption or generative AI use cases, the stock may disappoint investors. Therefore, it seems prudent to step aside until a more favorable price presents itself.
