SNOW

Here's Why I'm Loading Up on Snowflake Stock While It's Down 33%

Snowflake (NYSE: SNOW) has had much better days. In mid-February, the stock traded at $236 per share; now, it's hovering around $155. That's a drastic decline from its year-to-date high, and investors may be falsely assuming there's something horribly wrong with Snowflake.

But this looks like a great time to load up on Snowflake stock, not run for the hills. There are a few key indicators that point to why it could pay off to take a position in Snowflake, and being bold now could reward you in the long run.

Snowflake's business is vital for AI

Snowflake's fiscal 2024 fourth quarter (ended Jan. 31) results triggered a massive sell-off the past month. The results weren't all bad: Snowflake beat the high end of its internal revenue guidance by $17 million, or about 2%.

The bigger concern was visionary CEO Frank Slootman's decision to suddenly retire. Slootman had led Snowflake through its IPO process and its first few years as a public company. Losing him has shaken investor confidence, but the company is replacing him with a capable successor.

New CEO Sridhar Ramaswamy is taking on the role after previously serving as Snowflake's Senior Vice President of AI. He also led Alphabet's Google Advertising products, growing it from a $1.5 billion business to over $100 billion.

That's an impressive resume, and it should assure investors that Ramaswamy is right for the job because Snowflake is well positioned to see its own expansion from $2.8 billion in annual revenue to much more.

Snowflake's data cloud provides all the tools a client needs to collect, store, process, utilize, and sell data. It does this through a cloud-based offering, and it has become essential to the inner workings of many businesses.

Furthermore, data is a key component in creating useful artificial intelligence (AI) models. Without loads of data, these models are useless. As a result, Snowflake could see demand surge as more businesses realize the value of its offerings.

The market opportunity for its platform is massive, and Snowflake estimates its total addressable market will be worth around $248 billion by 2026.

With such a large growth runway in front of it, having a leader at the helm with experience capturing a vast market is critical.

The new CEO is already loading up on the stock

Ramaswamy appears to see the opportunity in Snowflake stock as well. He purchased $5 million of shares on the open market in late March. To paraphrase investor Peter Lynch, investors may have many reasons to sell a stock, but they only have one reason to go out and buy.

With this in mind, Ramaswamy likely believes the stock is undervalued, and from a historical perspective, he's right.

SNOW PS Ratio Chart

Data by YCharts.

Trading at just over 18 times sales, Snowflake is near the cheapest it has ever been since going public. However, 18 times sales isn't cheap, either. Investors usually value a company by sales when there are no profits (which Snowflake doesn't have), so it will be a long time before we can use a more traditional metric like the price-to-earnings (P/E) ratio.

But even if Snowflake could snap its fingers and instantly post a 30% profit margin (a very respectable margin for a software company), it would still trade for 60 times earnings. So despite its 33% fall since the end of February, Snowflake still trades at sizable premium to the broad market.

Wall Street analysts are projecting 22% growth in fiscal 2025 and 24% in 2026, though. Combined with the new CEO's own optimism, the stock's recent weakness presents an attractive buying opportunity.

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Keithen Drury has positions in Snowflake. The Motley Fool has positions in and recommends 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.

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