Is Snowflake Stock a Buy Now?

Shares of Snowflake (SNOW) have had a rough time in 2024, with investors worried about the company's slowing growth and high valuation. However, recent quarterly results have sparked new interest in this tech firm.

Following the release of its fiscal 2025 third-quarter results (for the period ending October 31) on November 20, Snowflake's stock soared nearly 33%. In this article, we will explore the reasons behind this stock surge and consider whether it might be a good time to invest.

Strong Financial Performance and Increased Guidance

Snowflake reported its fiscal Q3 revenue at $942 million, marking a 28% increase compared to the same quarter last year. This growth was largely fueled by a 29% rise in product revenue, which reached $900 million. The company’s revenue exceeded Wall Street's estimate of $897 million. Additionally, its non-GAAP earnings came in at $0.20 per share, surpassing the consensus estimate of $0.15 per share, even though it was lower than the $0.25 from the prior year.

The outlook provided by Snowflake is also promising. The midpoint of its fiscal Q4 product revenue forecast is set at $908.5 million, outpacing the analyst estimate of $884.5 million. Moreover, the company has raised its full-year product revenue guidance to $3.43 billion, signaling a 29% increase year-over-year, compared to its earlier estimate of 26% growth for fiscal 2025.

Snowflake has also improved its operating margin forecast to 5%, up from a previous estimate of 3%. The results indicate that the company's data cloud platform is increasingly popular, particularly with the integration of artificial intelligence (AI) solutions. By the end of the third quarter, Snowflake had over 10,600 customers, a 20% increase from the same quarter last year.

The company also experienced an uptick in customer spending, with the number of customers generating over $1 million in product revenue in the last 12 months rising 25% to 542. This higher spending from existing customers helps to explain Snowflake's increased margin guidance.

Snowflake's net revenue retention rate for the quarter stood at 127%, meaning existing customers are spending more on its platforms. This high retention rate showcases the growing demand for Snowflake's offerings and the value clients find in their services.

The company's remaining performance obligations (RPO), which indicate the total value of contracts to be fulfilled in the future, have also grown impressively. Snowflake finished the previous quarter with $5.7 billion in RPO, reflecting a robust 55% increase year-over-year. This suggests that the company’s revenue growth is positioned to remain strong.

Should You Buy Snowflake Stock Now?

With impressive figures and an optimistic outlook, some might wonder whether buying Snowflake stock is advisable. Despite the positive reports, the stock's valuation raises some concerns. Snowflake is currently trading at 16 times sales, over twice the average price-to-sales ratio of the tech industry, which sits at around 8.

Moreover, the company's earnings per share (EPS) is projected to decline from $0.98 last year to $0.70 in 2024. Analysts attribute this decline mainly to Snowflake’s investments in AI-related infrastructure, including significant resources allocated to graphics processing units (GPUs). However, the improved margin forecast suggests that profitability could rebound, leading analysts to predict a sharp increase in earnings moving forward.

Investors interested in growth stocks may see Snowflake as an appealing opportunity. Its expansive revenue pipeline, combined with the potential rise in earnings, could justify its current valuation. Notably, the recent results highlight that Snowflake's business prospects are poised for acceleration.

Harsh Chauhan does not hold any positions in the mentioned stocks. The Motley Fool holds positions in and recommends Snowflake. They have a disclosure policy.

Snowflake, Stock, Investment