Down 58% in This Bear Market, Can Snowflake Recover in 2023?

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What happened

Shares of Snowflake (SNOW -1.56%) have lost roughly 58% of their value since the market peaked on Jan. 3, 2022. While the company has generally served up strong business results over the last year, macroeconomic pressures including high levels of inflation and rising interest rates have led to substantial multiple contraction for equities. 

Due to its highly growth-dependent valuation, it’s not surprising that Snowflake’s sell-off in the current bear market has been significantly worse than the roughly 31% slide for the Nasdaq Composite index’s level. The data-services specialist is facing an unfavorable operating and valuation backdrop, but it’s far too early to give up on the stock. 

A snowflake on a red background.

Image source: Getty Images.

So what

With its highly growth-dependent valuation, Snowflake stock will likely continue to see trading heavily impacted by trends shaping the broader market. This means the company could continue to face valuation pressures in the near term, and the Federal Reserve’s decisions on interest rate policy will likely have an outsize impact on its stock performance this year. On the other hand, the company’s long-term outlook remains quite promising. 

Last quarter, Snowflake posted a net revenue retention rate of 165%, which means customers who were using its services in the prior-year quarter increased their spending on its services 65% year over year. The dual growth engines of customer additions and strong net revenue retention rates are powerful forces for sales expansion, and the company looks poised to shift into delivering profitable sales growth over the long term.  

Now what

Snowflake stock saw a substantial sell-off after publishing third-quarter results with guidance for product revenue growth to decelerate to approximately 49.5% year over year in the fourth quarter. Even after big sell-offs over the last year, Snowflake is valued at roughly 22 times expected forward sales. 

SNOW PS Ratio (Forward) Chart

SNOW PS Ratio (Forward) data by YCharts

With the potential for a prolonged economic downturn looming, Snowflake is seeing some customers pull back on spending, and there’s a good chance that this will play a significant role in shaping the business’s performance in 2023. On the other hand, a sustained recession may cause the Fed to move away from large interest rate hikes, which could pave the way for Snowflake’s stock to climb well above current levels. 

While the overall impact of macroeconomic trends on the company’s valuation in 2023 remains difficult to predict, Snowflake will likely still manage to grow revenue at a solid clip this year, and its long-term expansion outlook remains promising. The company is providing category-leading services that address crucial problems in the data analytics space, and its net cash position of roughly $3.1 billion should help it weather near-term challenges and pursue viable growth opportunities.

For long-term investors seeking stocks with explosive return potential, I think Snowflake stock stands out as a worthwhile buy. 

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.