Snowflake (NYSE:SNOW) specializes in software for cloud-based data warehousing. Sure, there’s an artificial intelligence connection with Snowflake, but it’s not really an AI company like OpenAI and C3.ai (NYSE:AI) are. My SNOW stock analysis indicates that the shares may be overvalued because of AI-market hype.
There’s a critical event coming up for Snowflake which investors need to pay attention to. I would even recommend taking profits, if you have them, on Snowflake stock before that date. So, stay tuned as we’ll get into the need-to-know details right now.
SNOW Stock’s Breathtaking Rally
Momentum-focused investors will probably like the fact that SNOW stock ran from $150 in October 2023 to $230 recently. Value-conscious investors might wince at Snowflake’s post-rally valuation.
Several Wall Street experts have pointed this out. For instance, Barclays analysts led by Raimo Lenschow wrote, “For SNOW, we are not comfortable to push the current high multiple (~16x CY25E EV/Sales) further as there is a lot of consumption recovery or new product contribution needed to deliver accelerating product growth.”
Monness Crespi Hardt analyst Brian White also expressed concerns about Snowflake’s valuation. First, White observed, “Benefiting from an overly exuberant tech market in the final quarter of 2023, and riding the coattails of an unprecedented AI hype cycle, Snowflake has rebounded sharply over the past couple of months.”
I concur with White’s assessment that “AI hype” prompted the sharp rally in SNOW stock. White concluded, “In our view, this has left the stock overvalued and vulnerable to selling pressure.”
Meanwhile, Stephen Bersey of HSBC Global Research believes that Snowflake’s valuation is “full.” According to Bersey’s calculations, Snowflake stock trades at 187 times his calendar 2024 EPS estimate for the company.
Snowflake Investors: Mark This Date on Your Calendar
With Snowflake’s non-GAAP trailing 12-month price-to-earnings (P/E) ratio currently at a lofty 303.4x, it certainly feels like Snowflake is richly valued. Thus, any disappointment could quickly send the stock lower. As the old saying goes, “Stairs up, elevator down.”
That’s why I don’t blame InvestorPlace contributor Thomas Niel for recommending that investors should “take the money and run.” This is especially true now, since Snowflake is getting ready to report its fourth-quarter 2023 earnings results on Feb. 28.
Wall Street expects Snowflake to have earned 18 cents per share for the quarter. That’s higher than any quarterly EPS forecast for Snowflake in recent memory. The risk-reward scenario just isn’t favorable here.
If Snowflake posts a wide EPS miss, the stock could fall sharply. And even if Snowflake beats Wall Street’s expectations, there’s a risk that the best-case scenario has already been priced into the shares.
SNOW Stock Analysis: Don’t Buy It at the Current Price
Please note, my SNOW stock analysis doesn’t indicate that Snowflake is a terrible company. The main problem is that AI hype seems to have pumped up Snowflake’s valuation to a dangerous level.
Plus, an upcoming earnings event could be the pin that pops the Snowflake stock bubble. Hence, it’s wise for Snowflake’s investors to take profits if they have any. If you were thinking about taking a share position in Snowflake now, it’s wise to wait and just watch from the sidelines.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
