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Snowflake (NYSE:NIYEBE) has many positive characteristics, including very fast growth, many prominent customers, “great technology,” a CEO who has been extremely successful in the past, and a very promising initiative. Additionally, Snowflake expects its cash flow to be positive this year. However, I do not expect the SNOW stock to perform very well over the next six months. As a result, I recommend that investors sell the shares until their value decreases further and/or the company’s profitability increases significantly.
SNOW Stock: Massive Appreciation
The main reason I am weak in the name for the medium term is the very high value of the stock. While I expect investors to be more positive in growth stocks in the intermediate term, I think they are likely to remain wary of companies with very high valuations in the long run.
SNOW stock is trading at a very high sales to forward price ratio, based on analysts ’average earnings estimate in 2022, which is 30 times. In a rising interest rate environment, that appreciation is excessive, even for a fast-growing, highly committed company like Snowflake.
Making the estimate is that, although Snowflake expects 15% free cash flow (FCF) margins this year, analysts, on average, only expect it to generate earnings per share ( EPS) of 16 cents this year and 38 cents next year.
Many Positive Attributes
Some analysts and investors were disturbed by the company’s guidance for product revenue growth this year of approximately 67%, down from 106% growth in such sales last year. But a 67% increase is still impressive, and the company’s CEO, Frank Slootman, explicitly said the company’s guidance is “conservative.”
Slootman has a good track record, as he was CEO of a start-up for four years before it sold for $ 1.8 billion and became chairman of Service Today (NYSE:NOW), whose stock rose during his tenure.
Plus, the company’s “retail data cloud” looks very promising, as retailers need to analyze a lot of data very quickly and efficiently in this time of intense competition and supply chain problems.
However, due to SNOW’s massive stock analysis, I urge investors to sell the shares right now and wait for a better entry point and/or a significant increase in profitability before taking a position in the name.
At the date of publication, Larry Ramer does not (whether directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the authors, subject to the InvestorPlace.com Publishing Guidelines.