Cloud-based data platform operator Snowflake Inc. (SNOW - Get Rating) in San Mateo, Calif., offers Data Cloud, an ecosystem that enables customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data. The company has ridden the tech wave quite well over the past two years, which is evidenced by the solid growth in its topline. The stock debuted in the market in September 2020, marking one of the biggest tech IPOs, and becoming the largest company to double its market cap on opening day.

SNOW benefits from its expanding customer base and has achieved exceptional revenue growth. The company’s product revenue came in at $312.46 million in its fiscal third quarter, ended October 31, representing 110% year-over-year growth. The company has 5,416 customers and 148 customers with trailing 12-month product revenue greater than $1 million.

SNOW invests heavily in product development and marketing, increasing its operating expenses, which led to a $157.27 million operating loss in the quarter. SNOW is suffering losses, and its return to profitability appears indefinite. Its net loss came in at $154.86 million, while its EPS was $0.51. Also, its cash and cash equivalents balance stood at $952.20 million, compared to the $3.95 billion year-ago value. SNOW shares have gained 3.5% in price over the past year but have slumped 10.1% year-to-date to close yesterday’s trading session at $304.70.

Here is what could shape SNOW’s performance in the near term:

The Anticipated Interest Rate Hike

The Federal Reserve has signaled that it plans to stop its asset purchases and hike rates beginning in March. Furthermore, U.S. Treasury yields are rising faster than many forecasts on the Fed’s expected monetary policy amendments to tackle inflation. Growth stocks like SNOW are generally negatively impacted in a rising interest rate environment. Strategists expect higher interest rates will foster  heightened stock market volatility and lower the valuations of growth and tech stocks. SNOW, which is already grappling with losses, could be significantly impacted, hampering its growth trajectory.

Tech stocks have had a rough start this year, with the tech-heavy NASDAQ down 9.7% year-to-date. Moreover, iShares Expanded Tech-Software Sector ETF (IGV) has slumped 12% year-to-date.

Poor Profitability

SNOW’s EBITDA margin and net income margin of negative 72.57% and 72.78%, respectively, is substantially lower than the 14.19% and 6.35% industry averages.

Moreover, SNOW’s ROE, ROA, and ROTC of negative 14.97%, 12.12%, and 9.19%, respectively, compare with the 8.00%, 3.86%, and 4.95% industry averages.

Stretched Valuation

In terms of forward EV/Sales, SNOW is currently trading at 71.97x, which is 1,820.7% higher than the 3.75x industry average. Also, its 76.02 forward Price/Sales ratio is 1,951.7% higher than the 3.71 industry average. Also, SNOW’s 4,662.01x forward Price/Cash Flow is 23,116.9% higher than the 20.08x industry average.

POWR Ratings Reflect This Bleak Prospects

SNOW has an overall D rating, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

SNOW has an F grade for Value. Its stretched valuations justify this grade.

It has a D grade for Quality, in sync with its negative profit margins.

Of the 82 stocks in the D-rated Technology – Services industry, SNOW is ranked #70.

Beyond what I have stated above, you can also view SNOW’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the Technology – Services industry here.

Bottom Line

Although SNOW is poised for long-term growth, the company is currently drowning in losses. Its depleted profit margins are concerning. Furthermore, there seems to be a disconnect between its ultra-premium valuation and its underlying fundamentals. Also, with the Fed gearing up to raise the interest rates, we think it could be best to avoid the stock.

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

While SNOW has an overall POWR Rating of D, one might want to consider investing in the following Technology – Services stocks with an A (Strong Buy) rating: Sanmina Corporation (SANM - Get Rating), PC Connection, Inc. (CNXN - Get Rating), and Celestica, Inc. (CLS - Get Rating).

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SNOW shares fell $2.20 (-0.72%) in premarket trading Thursday. Year-to-date, SNOW has declined -10.05%, versus a -5.97% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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