While many tech and artificial intelligence stocks have been flying high this year, Snowflake (NYSE: SNOW) is going in the opposite direction. Down 43% year to date, the cloud computing stock vastly underperformed the market -- the S&P 500 rallied 17% this year.
Snowflake's business faced multiple headwinds this year. It was involved in a data breach and investors weren't excited with a change in the CEO position that took place months earlier -- the stock still hasn't recovered from that.
But with shares of Snowflake being a bit more stable of late and its recent results not being all that bad in terms of growth, could the stock potentially have bottomed out? Is now a good time to add Snowflake to your portfolio?
The recent results suggest the data breach isn't hurting business
On Aug. 21, Snowflake reported its second-quarter results, which went up until the end of July. The company's revenue for the quarter totaled $868.8 million, a year-over-year increase of 29%. While the company's growth rate is continuing to decline steadily, there isn't a huge drop-off to suggest that it's facing increased headwinds due to the data breach that occurred earlier this year.
SNOW Revenue (Quarterly YoY Growth) data by YCharts
Snowflake CEO Sridhar Ramaswamy told CNBC's Jim Cramer that despite all the bad publicity, concerns related to the data breach are overblown. "These headlines, and that's what they are, have not really affected our core business with existing or new customers."
While it may be positive to see that the breach hasn't adversely affected the company's data storage business, Snowflake's growth rate is still slowing down, and that may not be sitting well with growth-oriented investors.
Snowflake's bigger problem may lie with the bottom line
A near-30% growth rate could make Snowflake a good stock to buy -- if it weren't for its brutal losses. Last quarter, the company's net loss totaled $317.8 million, which is 40% higher than the $227.3 million it incurred in the prior-year period.
What's particularly alarming to me is the CEO's answer to a slowing growth rate. In Ramaswamy's interview, he told Cramer, "We are investing in our future, whether it is in engineering or in sales to go sell the product more." It's the latter part of that quote that has me concerned that like many executives, Ramaswamy's answer is to hire more sales reps and spend more money on selling activities to grow the business.
Currently, the company's sales and marketing spend is 46% of its revenue. And research and development accounts for another 50%. At such high percentages of revenue, it's going to be incredibly difficult for Snowflake to ever achieve profitability, especially if the solution to grow its business is to spend more on sales and marketing.
Snowflake's stock could still go lower
Although Snowflake's sales didn't go over a cliff this past quarter, that doesn't mean the business is on a good path forward. If its growth rate continues to deteriorate, and it may amid a recession, there could be little reason to invest in the business right now as its high-spending ways mean that its losses may also grow larger in future quarters.
Without some hope of profitability on the horizon, I wouldn't take a chance on this tech stock. Although its valuation is lower, it's still trading at 12 times revenue and close to 10 times book value. Snowflake is trading at a hefty premium, and it's hard to justify it given the challenges the business is facing right now.
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David Jagielski 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.
