Snowflake Inc. (NYSE: SNOW) 

Snowflake Inc. (NYSE: SNOW) empowers organizations to leverage their data through its Data Cloud platform. The platform enables customers to centralize their data into a unified source of truth, unlocking valuable business insights, utilizing artificial intelligence (AI) to address challenges, creating data applications, and sharing data and products. Snowflake's platform supports a variety of workloads, including data warehousing, data lakes, data engineering, AI and machine learning (ML), application development, collaboration, cybersecurity, and Unistore.

Key Recommendation Rationale – Sell at USD 176.80

• Increasing Operating Losses: Snowflake Inc. has reported a substantial operating loss in both the third quarter and year-to-date figures. For the three months ending October 31, 2024, the operating loss was USD 365.5 million, reflecting a 40% increase compared to the same period in 2023. The nine-month operating loss stood at USD 1.07 billion, which was a significant rise from the previous year's loss of USD 819.3 million. This trend of rising losses, despite revenue growth, indicates that the company is struggling to control its operating expenses, particularly in areas such as sales and marketing, and research and development.
• High Sales and Marketing Expenditures: The company's sales and marketing expenses have been rising rapidly, reaching USD 438 million for the quarter, up 23% year-over-year, and totaling USD 1.24 billion for the first nine months of fiscal 2025, marking an increase of 20% from the previous year. While these expenditures contribute to revenue growth, they highlight Snowflake's reliance on heavy marketing investments to acquire and retain customers. The high spending raises concerns about the sustainability of the company's business model, especially if the return on these investments doesn't continue to grow at a comparable rate.
• Net Losses and Negative Net Income Per Share: Despite the company’s revenue growth, Snowflake continues to report significant net losses. For the third quarter of fiscal 2025, the company posted a net loss of USD 327.9 million, more than a 50% increase from the same quarter in 2023. This is mirrored in the net loss per share, which increased to USD 0.98 per share in Q3 2024 from USD 0.65 per share in Q3 2023. These mounting losses and negative net income per share signal that Snowflake’s current growth strategy may not yet be translating into profitability, potentially raising concerns for investors.
• Concerns Over Deferred Revenue Growth: Although Snowflake’s revenue has been growing, there are concerns regarding its deferred revenue, which is essentially the company’s unearned revenue for services not yet rendered. For the third quarter of fiscal 2025, deferred revenue declined slightly in the current portion, while the non-current deferred revenue showed a sharp decrease. This suggests that the company may be facing challenges in locking in long-term contracts or in managing its customer base's renewal rates, which could have a negative impact on future growth prospects.
• Cash Flow and Free Cash Flow Underperformance: While Snowflake reported positive cash flow from operations, the company's free cash flow has been relatively underwhelming. For Q3 2025, free cash flow stood at USD 78.2 million, reflecting just an 8% growth compared to the same quarter in 2023. This is concerning given the company’s ongoing losses, as it suggests that Snowflake may be struggling to convert its revenue into sustainable cash flow. Despite its growth in revenue and product sales, the modest free cash flow growth indicates inefficiencies in capital deployment and operational expenditures.
• Dependency on Customer Growth Amid Financial Losses: Although Snowflake has continued to grow its customer base, including notable growth among large, high-revenue clients, this customer acquisition comes at a significant cost. The company reported a net revenue retention rate of 127%, which is impressive, but also highlights Snowflake's dependency on new customer acquisition and expansion of existing accounts to offset the financial losses. If growth slows or if the company faces difficulties in retaining customers or gaining new large clients, Snowflake could experience a slowdown in its business momentum and face continued financial losses.

Valuation Methodology: Price/ Earnings Approach

Share Price Chart  

Conclusion

SNOW is expected to trade at a discount, owing to its struggling with increasing losses, high sales and marketing expenses, underperforming cash flow, declining deferred revenue, and heavy reliance on customer growth to sustain its financial performance.

Given its current trading levels, the recent rally in the share price, relative valuation, a very high P/E levels, and risks associated, it is prudent to book profit at the current levels. Hence, a ‘Sell’ recommendation is given on the stock at the current market price of USD 176.80, as on 22 November 2024 at 07:10 AM PST. 

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance level is 22 November 2024. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and/or technical analysis taking into consideration both short-term and long-term scenario.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

Note 6: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.