Snowflake Inc. (SNOW) is an international cloud-based data platform provider. The company’s platform provides Data Cloud, which enables customers to consolidate data into a single source of truth and is used by various organizations in a range of industries.

SNOW’s second quarter revenue increased 82.7% year-over-year to $497.25 million, which topped Refinitiv analysts’ expectations of $467 million by 6.5%. The company’s product revenue, which is a key metric, rose 83.1% from the prior-year period to $466.27 million. SNOW expects a product revenue between $500 and $505 million in its third quarter.

The stock has declined 49.4% year-to-date and 44.7% over the past year to close its last trading session at $171.49. However, it has gained 3.6% over the past month.

Here are the factors that could affect SNOW’s performance in the near term:

Bleak Financial Growth

For the fiscal second quarter that ended July 31, SNOW’s net loss increased 17.4% year-over-year to $222.81 million. Net loss per share attributable to common stockholders rose 9.4% from the prior-year quarter to $0.70. Operating loss came in at $207.73 million, up 3.8% from the same period the prior year.

Stretched Valuations

In terms of its forward non-GAAP P/E, SNOW is trading at 1,006.46x, 5,520% higher than the industry average of 17.91x. The stock’s forward EV/EBIT multiple of 1,183.38 is 7,460.6% higher than the industry average of 15.65. In terms of its forward Price/Cash Flow, SNOW is trading at 170.33x, 900.3% higher than the industry average of 17.03x.

Negative Profitability Margins

SNOW’s trailing-12-month EBITDA margin and net income margin of a negative 40.92% and 41.25% are significantly lower than their respective industry averages of 13.05% and 4.27%.

Its trailing-12-month ROE, ROTC, and ROA of a negative 13.00%, 8.15%, and 9.56% compare to their respective industry averages of 7.22%, 3.97%, and 2.82%.

POWR Ratings Reflect Bleak Prospects

SNOW’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

SNOW has a Value and Quality grade of D in sync with its stretched valuations and bleak profit margins.

In the 82-stock Technology – Services industry, it is ranked #73. The industry is rated D.

Click here to see the additional POWR Ratings for SNOW (Growth, Momentum, Stability, and Sentiment).

View all the top stocks in the Technology – Services industry here.

Bottom Line

Despite the substantial revenue growth, the company’s bottom line remained in the red. Moreover, the company’s bleak profit margins are concerning. With analysts expecting a 58.3% year-over-year drop in its EPS for the next quarter (ending January 2023), I think the stock might be avoided now.

How Does Snowflake Inc. (SNOW) Stack Up Against its Peers?

While SNOW has an overall POWR Rating of D, one might consider looking at its industry peers, Celestica Inc. (CLS) and Jabil Inc. (JBL), which have an overall A (Strong Buy) rating, and Information Services Group, Inc. (III) and NTT DATA Corporation (NTDTY), which have an overall B (Buy) rating.

SNOW shares were trading at $172.04 per share on Tuesday afternoon, up $0.55 (+0.32%). Year-to-date, SNOW has declined -49.21%, versus a -16.81% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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