A difficult year for Snowflake(NYSE: SNOW) investors only got worse after the second-quarter results from the cloud-based data warehousing company disappointed investors. The stock immediately fell 15% the session following its earnings announcement and is now down more than 40% on the year.
Let's take a closer look at the company's Q2 earnings report and judge if investors should consider buying the dip in the stock.
Good growth, but not good enough
Part of Snowflake stock's difficult performance this year stems from the company being involved in a cybersecurity attack that allowed hackers to access customer data. If the company hoped that its Q2 results would help ease investors' worries that the incident would not have an impact on its business, that didn't seem to happen.
Overall, Snowflake's Q2 results were quite strong, with revenue growing 29% to $869 million and topping the analyst consensus of $851 million. Product revenue, meanwhile, rose 30% to $829 million.
The company's loss per share, however, widened in the quarter from $0.69 to $0.95. Its revenue beat was also smaller than it was in Q1, and product revenue growth decelerated from 34% last quarter.
Management said that its innovation pipeline was accelerating and that it brought more product to market in the first half than it did for the entire year in 2023. Meanwhile, it said more than 2,500 accounts were using Snowflake AI on a weekly basis.
Snowflake spent $400 million to buy back stock in the quarter. It finished the period with $3.9 billion in cash and short-term and long-term investments, and no debt. It has a $2.5 billion repurchase program in place until the end of March 2027.
Looking ahead, Snowflake guided for full-year product revenue of approximately $3.36 billion, representing 26% year-over-year growth. That's up from a prior outlook of $3.3 billion. It continues to expect product gross margins of 75%, operating margins of 3%, and adjusted free cash flow margins of 26%.
As for the cybersecurity attack, Snowflake said the breach was on its customers' end and not on its side. As a result, it said the incidents did not impact consumption or its financial results. Going forward, though, the company will require its customers to use multi-factor authentication for all users.
Image source: Getty Images.
Is it time to buy the dip in the stock?
There are a few reasons why Snowflake has been struggling. The cybersecurity incident, whether it was its fault or not, did not help. Meanwhile, the company's valuation had clearly gotten ahead of itself. But perhaps the biggest reason is the belief that data warehousing is a business that will be disrupted by artificial intelligence (AI), with AI being used to analyze structured data.
More likely, data warehousing will remain the more cost-efficient method and AI will be more of an adjacent opportunity for the company. However, until proven otherwise, this could remain an overhang on the stock.
From a valuation standpoint, though, the company now trades at a much more reasonable price. Its forward price-to-sales (P/S) multiple based on next year's estimates has come down from around 20 times at the beginning of the year to now under 9 times.
SNOW PS Ratio (Forward 1y) data by YCharts
For a high-margin business growing by 25% to 30% per year, that's an appropriate multiple. However, the company needs to maintain that growth rate to also keep that multiple.
At this point, I think Snowflake now looks fairly valued. That said, given the stock's struggles this year, I'd want to scoop up the shares when they are in the bargain bin, and they aren't quite there yet despite the sell-off.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.
