Cloud-based data lake provider actions Snowflake (NYSE: SNOW) Shares of the U.S. group were rallying Monday, even though it was a quiet day for many technology stocks. Shares were up 4.8% as of 1:30 p.m. EDT.
Snowflake’s outperformance is likely due to a positive note from analysts at Goldman Sachswhich added the action to the company’s “condemnation list” today.
Goldman Likes Snowflake’s Entry Point and Innovation Pipeline
Goldman analyst Kash Rangan today added Snowflake stock to the firm’s “conviction list.” He said the stock’s recent weakness makes it an “attractive entry point” given that the stock is down for the year, though Rangan is bullish on the company’s new CEO, Sridhar Ramaswamy. Rangan believes Ramaswamy, who is a more product-focused manager than the company’s previous CEO, can accelerate Snowflake’s innovation engine to thrive in the AI era.
It’s worth noting that Ramaswamy co-founded AI research startup Neeva in 2019, which Snowflake acquired last year, bringing him into Snowflake. Since then, he’s been leading Snowflake’s artificial intelligence (AI) strategy, including the development of Snowflake Cortex, a fully managed service that simplifies using Snowflake for AI applications. In late February, he was named CEO, with former CEO Frank Slootman taking over the role of chairman of the board.
Can Snowflake grow to match its valuation?
Before Goldman’s note today, Snowflake was worth about $135 per share, not far from its IPO price of $120 (IPO Price in September 2020, almost four years ago.
It’s not that Snowflake’s business hasn’t been good. In the most recent quarter, core product revenue jumped 34%, and remaining performance obligations, which account for new capacity to be consumed and recognized by Snowflake in future periods, increased 46%. Net retention, or the amount of existing customers used in the most recent quarter compared to the prior-year quarter, was 128%.
There are concerns, though. Management has forecast product revenue growth of just 24% for the full year, implying a deceleration. RPO was a bright spot compared to last year, but actually slightly lower than the prior quarter. And a net retention rate of 128% actually marks a continued deceleration and the lowest number in Snowflake’s history as a publicly traded company.
With Snowflake having traded at extremely high prices throughout its existence as a public company, it’s still not particularly cheap. 15 times sales. So while Rangan may view Snowflake’s share price falling near its IPO price as a good entry point, keep in mind that the stock isn’t particularly cheap overall. The new CEO will need to be able to reaccelerate growth through AI innovation for the stock to have significant upside potential.
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Billy Duberstein and/or its clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and Snowflake. The Motley Fool has a disclosure policy.
Why Snowflake Rallied Today to Start July was originally published by The Motley Fool
