- Snowflake’s stock has faced volatility due to revised revenue growth expectations, but the recent 40% drawdown seems overdone.
- The company’s resilient backlog and strong bookings growth in the recent quarter suggest robust underlying demand, with revenue growth still exceeding the 30% threshold.
- Despite a slowdown in product revenue growth, the stock is undervalued based on EV/Sales/g ratio, compared to peers and has significant upside potential.
- The decision to include GPU-related costs in expenses and hire key personnel for AI capabilities indicates short-term margin pressure but potential long-term gains in the Generative AI trend.
Investment Thesis
Snowflake’s (NYSE:SNOW) stock has been a roller coaster, largely due to the AI frenzy driving up growth expectations earlier this year, but it faced a reality check when the company significantly trimmed its growth outlook for FY2025. In my previous article, I initiated a hold rating due to the gloomy growth outlook and lofty valuation, which would prevent the stock from sustaining a rally. Since then, the stock was down 9% compared to a 27% rally for the S&P 500 index.
In the recent quarter, the company showed resilient backlog and bookings growth. With a strong product revenue beat and a 33% YoY growth, I believe the management’s full-year revenue guidance is conservative. In terms of EV/Sales/g, the stock is trading at a cheaper valuation compared to the sector average, following a significant reduction in the forward growth outlook. Since the street consensus has largely been set lower, I upgrade my rating to “buy” as the 40% drawdown over the past three months seems overdone.
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