Is Snowflake Stock a Buy Now?

Shares of Snowflake (NYSE: SNOW) have struggled throughout 2024, primarily due to fears surrounding the company’s slowing growth and high stock valuation. However, recent quarterly results have provided a much-needed boost to this beleaguered tech firm.

Following the announcement of its fiscal 2025 third-quarter results on November 20, Snowflake's stock surged by nearly 33%. This reaction raises the question: Is now the right time to invest in this technology stock, considering its potential for further growth?

Snowflake Exceeds Wall Street Expectations and Raises Guidance

In its latest fiscal Q3 report, Snowflake revealed a revenue of $942 million, marking a 28% increase compared to the same quarter last year. Notably, product revenue rose by 29% to reach $900 million, significantly surpassing analysts’ expectations of $897 million. However, the non-GAAP earnings reported were $0.20 per share, which, while lower than the previous year's $0.25, exceeded the consensus estimate of $0.15.

Perhaps most exciting for investors was the updated guidance. For fiscal Q4, Snowflake projected product revenue of $908.5 million, well above the analysts' estimate of $884.5 million. Furthermore, the company has raised its full-year product revenue forecast to $3.43 billion, representing a healthy 29% increase year-over-year, up from an earlier estimate of 26% growth.

Additionally, Snowflake has adjusted its operating margin expectations from 3% to 5%. This impressive quarter can be attributed to the broader adoption of the company's data cloud platform, which is increasingly integrating artificial intelligence (AI) solutions. As of the end of Q3, Snowflake reported over 10,600 customers, a 20% increase from the prior year.

Moreover, higher customer spending also contributed to the growth, with the number of customers generating over $1 million in product revenue in the past year jumping 25% to 542. Snowflake’s ability to maximize business from its current customers is evident, as reflected in its improved margin outlook.

This positive trend is exemplified by Snowflake's net revenue retention rate of 127%, indicating that existing customers are either adopting more of its services or increasing their usage. This combination of customer growth and greater spending showcases the robust future revenue pipeline of Snowflake.

The company's remaining performance obligations (RPO) stood at $5.7 billion at the end of the last quarter, illustrating a remarkable 55% year-over-year improvement. This figure signifies the total value of contracts Snowflake plans to fulfill in the future, indicating continued strong revenue growth ahead.

Given the generated revenue of $3.2 billion over the past four quarters, the RPO suggest a promising path for adequate future revenue generation. As a result, analysts are optimistic and have revised their growth expectations for Snowflake upwards.

Is the Stock Worth Buying Now?

While Snowflake's recent performance appears strong and the revised guidance is encouraging, potential investors should consider the stock's current valuation carefully. Currently, Snowflake trades at a steep 16 times sales, significantly above the average price-to-sales ratio of 8 within the U.S. technology sector. Additionally, there are concerns regarding the company's potential earnings decline, with analysts predicting a drop to $0.70 per share in 2024, down from $0.98 the previous year.

This earnings pressure stems from Snowflake's investments in AI-related infrastructure, including graphics processing units (GPUs). Nonetheless, the company's improved operating margin outlook suggests that margins may soon stabilize, supporting forecasts for a rebound in earnings starting next year.

Hence, for investors seeking growth stocks, Snowflake may represent a viable option. Its robust revenue pipeline and the expected increase in earnings could help mitigate concerns about its current valuation, especially in light of the recent performance indicating that its business is poised for acceleration.

Snowflake, Stock, Investment