During its latest fourth-quarter results, Snowflake (NYSE:SNOW) produced impressive metrics on the surface, including robust top-line growth, yet failed to excite investors falling nearly 50% from their November peak above $400.
Last week, the company said it had 5,944 customers in the fourth quarter ended on Jan 31, up from 4,139 a year earlier. Despite the company's rapid growth, shares of the company dropped sharply.
After its September 2020 public market debut, which saw shares open at $245, more than double its listing price, shares of the company closed at $209.65 on Friday.
Snowflake's revenues in the fourth quarter totaled $383.8 million, up 101% year-over-year, easily outperforming the $372.7 million average predictions.
Moreover, Snowflake's gross profit margin rapidly expanded, having improved from 69% a year ago to 74%, while free cash flow grew nearly fivefold over the past year to $102 million.
Even if the company is technically still losing money on the bottom line, it seems like Snowflake is growing and moving its financial metrics in the right direction. It begs the question then of what caused the market's adverse reaction.
Notably, expected revenue growth for the upcoming fiscal year went from 106% to 66%, leaving little room for error when valued so richly.
Snowflake has been one of the most expensive stocks on the market since its IPO, and ultimately, high valuations create high expectations.
Partner Eric Anderson at Scale Venture Partners suggested that Snowflake's pricing model "makes forecasting to public markets tricky, and definitely trickier than the typical SaaS subscription-based models that public-market investors have become more familiar with," adding that most investors are looking at even subtle differences in growth rates as indicators of future trends.
Snowflake, currently the most rapidly growing stock of all major cloud stocks, is a fundamentally strong company that could be an excellent long-term growth stock to own.
Wall Street analysts are cautiously optimistic about the stock with a Moderate Buy rating based on 14 Buys and 6 Holds. The average Snowflake stock prediction of $331.21 implies an upside potential of approximately 58% to current levels for the stock.
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