Snowflake Stock Faces Potential Fall Amid Overvaluation Concerns

Snowflake stock experienced an impressive surge during the final two months of 2023, witnessing a more than 40% rally to close the year. However, one analyst is expressing skepticism about the future of the cloud-based data-warehousing software company, suggesting that its positioning as an artificial-intelligence player may be overrated.

Brian White, an analyst at Monness Crespi Hardt, recently downgraded Snowflake stock from Neutral to Sell while maintaining a $160 target price. As 2023 came to a close, Snowflake shares reached $199, and the closing price on Wednesday was $184.21. Although the stock dipped slightly on Thursday morning, down 0.5% to $183.49, White’s concerns about overvaluation remain.

According to White’s research note, Snowflake has witnessed a robust rebound in recent months due to an overly exuberant tech market and the excitement surrounding the AI industry. However, the analyst believes this has resulted in an inflated stock value that is now vulnerable to selling pressure.

While White asserts that Snowflake is well-positioned for long-term opportunities in cloud computing and various secular trends, he raises concerns about thin margins, a rich valuation, and intense competition. Moreover, he predicts that the darker days of the economic downturn are still ahead. Notably, White tends to include his pessimistic macroeconomic outlook in all of his research reports.

Another area of concern highlighted by the analyst is Snowflake’s revenue growth, which has been gradually decelerating for eight consecutive quarters. White emphasizes that this decline is not only lengthy but also severe. In the fiscal third quarter of 2022, revenue growth stood at an impressive 110%; however, this number dropped significantly to 32% in the latest quarter.

It remains to be seen how Snowflake will navigate these challenges and whether the stock will indeed face a fall in the near future. Investors and industry watchers will closely monitor the company’s performance and response to market conditions moving forward.

Snowflake’s Operating Margin and Valuation

According to Eric J. Savitz, Snowflake holds a rather unflattering title in the enterprise software realm. The company generated the lowest operating margin among the stocks covered by analysts, with a margin of 9.8% for their most recent quarter. Comparatively, the average operating margin for other enterprise software stocks, excluding Snowflake, was 25.2%.

Furthermore, Snowflake boasts the highest valuation in its sector. Trading at nearly 16 times the estimated revenue for calendar year 2024, it outshines the average valuation of 7.1 times sales for the rest of the stocks under analysis.

Exaggeration of Snowflake’s Position in Generative-AI Software

Despite Snowflake’s prominence, some investors have purportedly exaggerated its standing in the generative-AI software narrative. This hype has found its way into the company’s earnings calls, investor conferences, and customer events. However, unlike tech giants such as Alphabet, Snowflake is not recognized as a pioneer or leading player in the generative-AI movement. Nevertheless, Snowflake has embraced the prevailing zeitgeist of the tech industry by aligning itself with the axiom that “there’s no AI strategy without a data strategy”.

Tech analyst Eric J. Savitz expresses skepticism about the overarching optimism surrounding generative-AI. He believes that this enthusiasm will ultimately disappoint many by the year 2024.