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Although the data cloud specialist Snowflake (NEW STOCK EXCHANGE: SNOW) reported better-than-expected fiscal second-quarter results earlier this week, stocks have retraced slightly since the report. But analysts seem unfazed. In fact, the analysts’ 12-month average price target for the stock implies an upside of around 30%. Furthermore, virtually every Wall Street analyst who published notes on growth stocks and updated their model after the company’s report has reiterated a Buy rating (or an equivalent rating such as “Overweight” or “Outperform”).
But are analysts right to remain so bullish on the stock even as the company’s top revenue growth slows dramatically and management points to a further slowdown in the current quarter?
Let’s take a look at what analysts are saying and why investors may want to view their price targets with a grain of salt.
the case of the bull
A review of four analysts’ upbeat notes on the stock after the company’s earnings report reveals several common themes. In general, analysts pointed to an improvement in the most recent business trends.
“[T]Sentiment really seemed to turn around in July, and customers really engaged with us again,” Snowflake CFO Michael Scarpelli said during the company’s fiscal second-quarter earnings conference call when discussing sales trends. Although Scarpelli was careful to note that improved reserves do not translate directly into consumption, and consumption is ultimately how the company records revenue, as Snowflake operates a business model based on in using.
TO Raymond James The analyst who has an outperform rating on the stock and a 12-month $170 price target also drew attention to Snowflake’s opportunity in artificial intelligence (AI).
This observation reflects management comments on the matter.
“Generative AI is at the forefront of conversations with customers,” Snowflake CEO Frank Slootman said on the company’s fiscal second-quarter earnings conference call. “However, companies are also realizing that you can’t have an AI strategy without a data strategy to base it on.” He went on to note that Snowflake’s data sharing platform uniquely positions the technology company to help enable customers’ AI workloads.
buyer beware
While Snowflake is well positioned amid many growth trends, investors should consider the risks carefully before rushing to buy stocks. Sure, the company grew fiscal second-quarter revenue 36% year-over-year. But that growth rate is down from 48% in the quarter that ended just three months earlier. Furthermore, Snowflake’s management guided fiscal third-quarter product revenue (generally around 95% of Snowflake’s total revenue) to grow at an even slower pace, between 28% and 29%.
Given the stock’s nearly $50 billion market capitalization despite the company still reporting net losses, the market appears to be anticipating Snowflake’s growth rate to stabilize and eventually even reaccelerate. But when asked directly during the company’s earnings conference call whether management expects growth to pick up again next year, Scarpelli simply said: “Let’s finish the third quarter and then […] see what next year will be like.” But he did point to “a lot of new things coming out next year” when it comes to platform features that he expects will positively impact the company’s revenue growth rate.
In general, the stock price already seems to be pricing in a stabilization and a rebound in growth rates. However, most analysts remain bullish on the stock. You may be underestimating the company’s long-term potential.
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Daniel Sparks does not have a position in any of the mentioned stocks. His clients may own shares of the mentioned companies. The Motley Fool has positions and recommends Snowflake. The Motley Fool has a disclosure policy.
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