Snowflake (NYSE:SNOW) experienced an avalanche of a post-earnings sell-off late last month. Immediately after the Feb 28 earnings release, SNOW stock tumbled by nearly 20%.
In the weeks that followed, shares in this cloud data company continued to slide lower, but admittedly have started to find support in more recent trading days. As the stock sits just above $150 per share, some are sensing opportunity with this supposed AI play.
However, while it may seem like a “buy the dip” situation on the surface, a closer look suggests that is far from the case. In fact, taking two major issues with SNOW into account, forget about shares making a quick recovery. Instead, a move to considerably lower prices may come next.
Why SNOW Stock Tumbled After Earnings
Snowflake may have exceeded Wall Street’s revenue and earnings forecasts with its quarter ending Jan. 31, results, but this revenue and earning beat was far outweighed by two negative developments.
First, the announced exit of CEO Frank Slootman. This news caught the market by surprise. Slootman’s successor, Sridhar Ramaswamy, has an extensive background in AI and machine learning, but Slootman has a longer track record of leading and scaling up large tech companies.
As a Forbes piece put it in 2021, before leading Snowflake, Slootman “pulled off similar magic” as CEO of Data Domain and ServiceNow (NYSE:NOW).
Second, alongside the CEO change news came another negative surprise for SNOW stock investors. That would be the updates to Snowflake’s FY2025 guidance. Product revenue guidance of $3.25 billion came in well below consensus of $3.43 billion.
Guidance for operating margin this year (6%) also fell short of forecasts calling for operating margins of 9.5%.
In short, the company unveiled both greater uncertainty (with the CEO change) as well as conceded that growth continues to decelerate. The market reacted to this disheartening news at the onset. However, don’t assume that the dust is starting to settle.
Don’t Buy into the ‘Buy the Dip’ Narrative
The SNOW stock slide has resulted in shares falling by around 30%. With such a large price decline over such a brief span of time, it’s no surprise that a “buy the dip” narrative is emerging.
On March 15, Guggenheim’s John DiFucci issued an analyst upgrade on SNOW. Although this upgrade merely entailed a rating change from “sell” to “neutral,” DiFucci argues that there is now an attractive near-term setup for shares.
Namely, because channel checks suggest that data warehouse consumption could soon start to bounce back.
Investors may be looking to this and similar arguments, and coming to the conclusion that positive surprises are just around the corner.
Per this narrative, if Snowflake reports better-than-feared results in the coming quarter, this stock will quickly recover. However, given the extent in which revenue guidance fell short of expectations, “less bad” may not be enough to drive a comeback.
Snowflake may beat forecasts, but still continue to convey that it is experiencing a growth slowdown. Slowing growth is the first “major issue” I hinted at above.
The second issue is valuation. If a growth slowdown persists, this really calls SNOW’s triple-digit forward earnings multiple into question.
As the Meltdown May Continue, Stay Away
In the immediate term, SNOW may sustain a valuation of 166.6 times forward earnings. Hope remains that a growth resurgence is just around the corner.
While not certain, there may still also be hope that Snowflake will be able to eventually capitalize on the current generative AI boom.
However, hope and hype for Snowflake could again be dashed. Subsequent results and guidance could still show slowing growth. SNOW bulls may finally throw in the towel when it comes to the AI growth narrative.
If this happens, Snowflake shares could tumble considerably further, given the stock’s still-steep multiple. SNOW could fall 50%, 60%, or even more, and still sport a valuation that arguably stretched given its changing growth trajectory.
As the SNOW stock meltdown may continue, to avoid getting buried, don’t buy the dip. Stay away instead.
On the date of publication, Thomas Niel did not hold (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.comPublishing Guidelines.
