In 2020, data company Snowflake (NYSE: SNOW) went public in one in every of the preferred initial public offerings (IPO) of all time. The IPO priced at $120 per share, nevertheless the stock finished its first day of trading above $250 per share.

Now, approaching 4 years later, Snowflake stock is down about 40% from where it closed on day one. In short, it has been an entire dud for early investors.

I’d not blame Snowflake entirely for the poor performance of its stock because the business has excelled. Here’s how its financials have looked in each of its 4 complete fiscal years since its IPO.

Source: Snowflake’s press releases. Table by author.

Snowflake’s revenue is type of five times higher now than when it went public, and it generates strong free money flow. The stock fell during this time, nonetheless, because it was priced irrationally high at its peak.

Indeed, at one point, Snowflake stock traded at over 100 times trailing sales. That sometimes happens with small firms, but Snowflake was already a giant business on the time. In short, it’s hard to search out upside when shares are that expensive. That said, the chart below shows it’s fallen to an all-time low valuation.

With the stock still underperforming and valuation at a modern low, it’s time to take into consideration whether Snowflake stock is finally a buy.

Two reasons I’m still not sold on Snowflake

To be clear, a price-to-sales ratio of 17 doesn’t put Snowflake stock in value territory — it’s still trading at a premium price. The high price tag shouldn’t be a deal-breaker in isolation, however it surely highlights the need for robust growth for an investment on this company to repay.

That growth shouldn’t be on tap in Snowflake’s fiscal 2025 (which began in February). The company only guided for 22% product revenue growth in the current yr. And there are two reasons this offers me pause.

Snowflake is being celebrated as a top stock for the artificial-intelligence (AI) trend. Despite every little thing, the company’s services handle immense amounts of enterprise data, and AI makes use of big amounts of knowledge. Attributable to this fact, Snowflake would appear to be a natural beneficiary of growth on this space.

Nevertheless, the AI trend is already rolling, so there must be some noticeable profit to Snowflake already. But the company just guided for its slowest yr of growth ever. That’s the first reason I’m still not sold on Snowflake immediately.

Story continues

The other reason I’m not sold on Snowflake stock is expounded to management’s long-term outlook. Since it went public, the company has been targeting $10 billion in product revenue for fiscal 2029. Nevertheless, its guidance for fiscal 2025 puts it below the pace it needs to realize this goal on time.

Management appears to have hinted on the potential of falling in need of its fiscal 2029 goal too. Snowflake’s investor presentations have on a regular basis included a reference to the fiscal 2029 outlook, but its latest quarterly presentation quietly left this detail out.

Not all doom and gloom

Snowflake is a big business, yet it’s still growing at a double-digit rate. That’s value noting. The company shouldn’t be falling apart — it’s just not growing as fast as I feel it must in an effort to justify its price.

Moreover, Snowflake’s slowing growth rate could improve. I noted my concern that the company doesn’t look like benefiting from AI yet, but perhaps that’s the actual reason leadership has seen changes. Frank Slootman took Snowflake public, but he announced his retirement in February and handed the reins to Sridhar Ramaswamy, who was notably accountable for the company’s AI efforts.

In other words, this CEO transition is likely to be tacit recognition that Snowflake has a golden opportunity with AI, and Ramaswamy is taking on to ensure the company can capitalize on it.

For his part, Ramaswamy seems convinced of Snowflake’s potential as he just bought $5 million of the stock.

Ramaswamy’s appointment and stock purchase don’t make Snowflake stock a buy on their very own. Nevertheless it’s enough reason to control this business because future results could improve and put my concerns to rest.

Do you have got to speculate $1,000 in Snowflake immediately?

Before you buy stock in Snowflake, consider this:

The Motley Idiot Stock Advisor analyst team just identified what they imagine are the 10 best stocks for investors to buy now… and Snowflake wasn’t one in every of them. The ten stocks that made the cut could produce monster returns within the approaching years.

Consider when Nvidia made this list on April 15, 2005… for those who occur to invested $1,000 on the time of our suggestion, you’d have $466,882!*

Stock Advisor provides investors with an easy-to-follow blueprint for achievement, including guidance on constructing a portfolio, regular updates from analysts, and two latest stock picks every month. The Stock Advisor service has greater than quadrupled the return of S&P 500 since 2002*.

See the ten stocks »

*Stock Advisor returns as of April 15, 2024

Jon Quast has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Snowflake. The Motley Idiot has a disclosure policy.

Is Snowflake Stock a Buy Now? was originally published by The Motley Idiot