Snowflake Stock Still Sports an Excessive Valuation

Stocks to sell

Snowflake (NYSE:SNOW) has many positive characteristics, including extremely rapid 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 don’t expect SNOW stock to perform very well over the next six months. As a result, I recommend that investors sell the shares until their valuation drops much further and/or the company’s profitability meaningfully increases.

SNOW Stock: Still-Gigantic Valuation

The main reason that I’m bearish on the name for the medium term is the stock’s still-exorbitant valuation. Although I expect investors to become more positive towards growth stocks in the intermediate term, I think that they will probably remain cautious on companies with extremely high valuations for a long time.

SNOW stock is trading at an extremely high forward price-sales ratio, based on analysts’ average 2022 revenue estimate, of 30 times. In a rising interest rate environment, that valuation is excessive, even for a rapidly growing, highly promising company like Snowflake.

Making the valuation more excessive 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 upset by the company’s guidance for product revenue growth this year of about 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 stated that the company’s guidance was “conservative.”

Slootman has a wonderful record, as he was CEO of a start-up for four years before it was sold for $1.8 billion and was chairman of ServiceNow (NYSE:NOW), whose stock soared during his tenure.

Further, the company’s “retail data cloud” appears to be very promising, as retailers have to analyze a great deal of data very quickly and efficiently in this era of intense competition and supply chain problems.

Still, given the still-tremendous valuation of SNOW stock, I urge investors to sell the shares for now and wait for a better entry point and/or a meaningful increase in profitability before taking a position in the name.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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