shares of snowflake (snow -3.59%) Shares plummeted in late February as the company not only issued unimpressive forecasts but also announced the sudden resignation of CEO Frank Slotman. The stock was trading around $230 before the earnings release, but fell to $165 on Wednesday.
A sudden sharp drop seems extreme, especially for a stock like Snowflake that could benefit from promising long-term trends in artificial intelligence (AI), and should increase demand for cloud-based data platforms. Is this an overreaction from Snowflake investors, or is it simply past its time for a stock that trades at more than 20 times sales but has yet to turn a profit?
This quarter alone likely wasn't bad enough to cause such a decline.
Snowflake's quarterly operating loss widened to $275.5 million in the fourth quarter ended Jan. 31, from $239.8 million a year earlier. However, revenue increased 32% year over year to $774.7 million, and the company's net revenue retention rate remained high at 131%.
The only soft spot in terms of growth was the outlook for the first quarter, where the company expected revenue of $745 million to $750 million, slightly below analysts' expectations of $759 million.
Investors are bearish on the results, citing wider losses and slightly lower-than-expected growth, but they alone were enough to cause the stock to drop 19% after last week's earnings. It's hard to imagine.
The sale was likely triggered by the news that Mr. Slotman, who contributed to the company's initial public offering in 2020, would be retiring. alphabethas been at the helm of Google as CEO for over 15 years.
Should a CEO change worry investors?
Changes in management are not necessarily a cause for concern for investors, especially if they simply involve retirement. That may have surprised investors, but that doesn't mean the business is going in a vastly different direction or that it's going to be risky going forward.
“There is no one better suited than Sridhar to lead Snowflake into its next phase of growth and realize future opportunities in AI and machine learning,” Slootman said in a statement.Investors must remember that apple Although the company lost its visionary CEO Steve Jobs in 2011, its value continued to rise and today it is one of the most valuable companies in the world.
Snowflake's fundamentals and valuation should be a bigger concern
As a prospective investor, I'm more concerned about the things that have plagued Snowflake for some time, including the lack of profitability and high valuation. This tech stock has recently been trading at nearly 22 times trailing earnings, which is a very high multiple compared to other AI stocks.
SNOW PS ratio data by YCharts
The company's cash flow is also not surprising from a stock-based compensation (SBC) perspective. Snowflake's operating cash flow after SBC for the fiscal year 2024 ended January 31 was negative $319 million.
Although companies exclude SBC from operating cash flow, I think it is important for investors to consider SBC as an expense. Being paid in cash rather than stock can significantly change the way you view a company's operating cash flow. And in Snowflake's case, its underwhelming financial performance, especially when combined with its lack of profitability, should raise red flags for prospective investors.
Is Snowflake stock a buy today?
Snowflake's stock was expensive before the crash (and probably still is), so the drop in valuation is understandable, but it's not because of a sudden CEO change. Investors likely overreacted to the news of a change in management. But even with a discount, Snowflake may still not be an attractive buy at this point, given its lackluster financials.
Although the company is growing rapidly, its losses are also increasing, and when you add in SBC, the company is running out of cash. Snowflake's share price is still up 25% over the past 12 months, but it wouldn't be surprising to see the stock decline. That's because Snowflake is still a company that needs to prove it can be profitable and generate positive cash flow. Without support, SBC.
Alphabet executive Suzanne Frye is a member of The Motley Fool's board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. David Jagielski has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, and Snowflake. The Motley Fool recommends his C3.ai and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
