Artificial intelligence (AI) stocks have been doing well for the most part this year, but one exception is Snowflake (NYSE: SNOW). The data-storage company should be benefiting from a surge in AI-related spending, but instead, its share price is down 30% this year. What's wrong with Snowflake, and can now be a good time to invest in the company? Or could things get even worse for the stock?
The stock hasn't rebounded from a change in leadership earlier this year
Snowflake's struggles this year began in February, when investors learned that the company's CEO, Frank Slootman, was retiring. The news came as a surprise, and it led to a sharp sell-off. And the stock hasn't been able to recover since then.
Even though new CEO Sridhar Ramaswamy comes with a strong background in tech, including working at Alphabet and being in charge of Google's ad business, investors have remained skeptical of the company's future without Slootman.
Changes in leadership can unfortunately create uncertainty for a company, even though it may stay on largely the same trajectory and possess the same growth opportunities as it did before.
Snowflake's slowing growth and lack of profitability aren't helping
Another problem for Snowflake is that the company's growth rate has been slowing down sharply in recent quarters. It hasn't been getting a big boost due to AI-related spending, at least not yet. While its growth rate remains high at more than 30%, investors may have been expecting more of an uptick in revenue by now.
SNOW Revenue (Quarterly YoY Growth) data by YCharts
Ramaswamy said that during the first quarter (ended on April 30), Snowflake's AI products are available and they "are generating strong customer interest." But without quantifying how much that interest means in terms of real dollars, investors appear to remain unimpressed.
Further exacerbating these issues is that Snowflake's losses aren't improving. Last quarter, the company incurred an operating loss of $348.6 million, which was 28% higher than the $273.2 million loss it reported in the prior-year period.
Growing the top line is important, but investors will expect that there is a path to profitability as well -- and that's not visible in Snowflake's financials right now.
Data breach could hurt the brand's image
Earlier this year, Snowflake also disclosed a cyberattack that impacted multiple clients. And now, investors are learning that telecom company AT&T and its more than 240 million U.S. customers appear to be impacted due to that breach.
The breach could have a lasting impact on Snowflake's reputation and hurt its ability to attract new customers, and it may result in a loss of existing ones. This is particularly troubling for a company such as Snowflake, where its high growth rate is a key reason growth investors buy the stock.
Is Snowflake stock too risky to buy right now?
Snowflake's stock has been nosediving and it's hard to tell how much longer this tailspin might continue. But I don't expect it'll recover this year, as its guidance is likely to take a hit given the recent data breach.
If you're bullish on AI, the stock could still make for an underrated buy, but be warned, as it could be a bumpy ride ahead for the business. Companies generally recover from data breaches and while the bad news may seem overwhelming for the business right now, investors generally have short memories.
For contrarian investors who are comfortable with some risk, Snowflake could be worth taking a chance on. But if you're a risk-averse investor, you may want to wait on the sidelines for now as things may get worse before they get better for Snowflake.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Snowflake. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
