With shares of data cloud technology company Snowflake(NYSE: SNOW) getting hammered this week following its fiscal second-quarter earnings report, some investors may be wondering if this is a good opportunity to buy the dip in the growth stock. After all, shares are not only down more than 40% over the last 12 months, but they are trading far below the $245 price the stock started trading at on its public debut in 2020.
But investors shouldn't let a falling stock price fool them into automatically concluding the data cloud platform provider's shares are a bargain. A close look at Snowflake's earnings report reveals several major concerns about the company -- particularly in the context of the stock's sky-high valuation.
Slowing growth
Reacceleration in product revenue (about 95% of total revenue) earlier this year didn't last long. The company, which provides a platform for companies to access, manipulate, and share their data in a unified and seamless digital environment, reported a product revenue growth rate of 34% in the first quarter of fiscal 2025, up from 33% in the quarter ended three months earlier. But this key metric fell to 30% in Snowflake's just-reported quarter.
If it wasn't for one more disappointing data point when it comes to Snowflake's growth, investors could likely forgive the company for a slight slowdown in its high growth rates. But the following key metric was particularly disappointing in the context of the company's growth story. Management guided for just 22% year-over-year growth in fiscal third-quarter product revenue.
The problem with this slowing growth and management's top-line guidance is how it looks next to the stock's frothy valuation. As an unprofitable tech company trading at 13 times sales, investors should be holding Snowflake's business performance to a high bar. A slowdown like this could cause investors to lose faith in the company's ability to scale over time and become profitable enough to justify such a rosy valuation.
Huge losses
Perhaps even more concerning is the company's discouraging bottom line. Snowflake's net loss of about $318 million for the quarter not only widened on an absolute basis from the year-ago quarter's loss of approximately $227 million, but it grew as a percentage of total quarterly revenue. The net loss in the second quarter of fiscal 2025 equaled more than 36% of revenue. This compared to 34% of revenue in the year-ago period.
This was driven by a step-up in the cadence of the company's investments in research and development spending, marketing, and the purchase of high-tech chips to power its platform.
The unlikely bull case
Overall, I think slowing revenue and higher costs destroy the bull case for this stock -- at least at the current price. Still, it's worth pointing out how I could be wrong: This revenue slowdown could be troughing.
Management noted in the company's fiscal second-quarter earnings call that it's seeing signs of a more stable demand environment. With Snowflake recognizing revenue based on customer usage of its platform, the data cloud specialist's customers often focus on optimizing their usage when they are trying to be more judicious about their spending. These "optimizations," as management calls them, were increasing last year but they are now showing signs of stabilizing, Snowflake Chief Financial Officer Michael Scarpelli explained to investors during the call.
If an improving demand environment helps Snowflake's product revenue growth rate stop decelerating, the company could grow into its valuation faster than I anticipate. Nevertheless, I'd qualify this prediction as speculative at this point.
Investors with shares of Snowflake may want to consider whether they should sell the stock and buy something that looks more attractive.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.
