Copyright Forbes
Snowflake (NYSE: SNOW) stock has jumped 130% in the last year, significantly outperforming the S&P 500’s 20% increase. The enthusiasm is easy to grasp. Snowflake is positioning itself at the crossroads of cloud data and artificial intelligence. To begin with, Snowflake is marketing its AI Data Cloud as the next step in enterprise computing. In addition, the company has introduced new AI-focused products, including Cortex for financial services, aimed at attracting regulated sectors. Furthermore, alliances such as its partnership with Palantir have heightened the belief that Snowflake could serve as the data backbone for the AI age. See Buy or Fear Snowflake Stock? However, here’s the hard reality — Snowflake is currently priced at over 20 times sales and is still significantly unprofitable. While it's easy to become caught up in the AI narrative, history indicates that such valuations offer little margin for error. That being said, if you are looking for upside potential with less volatility compared to holding a single stock like SNOW, consider the High Quality Portfolio. It has considerably outperformed its benchmark—a mix of the S&P 500, Russell, and S&P MidCap indexes—and has generated returns exceeding 105% since its inception. What explains this? Collectively, HQ Portfolio stocks have provided superior returns with decreased risk compared to the benchmark index, avoiding large fluctuations, as demonstrated in HQ Portfolio performance metrics. The Fundamental Problem We concur that Snowflake holds long-term potential and that its technology is central to the AI revolution. Nevertheless, investors need to differentiate between narrative and reality. MORE FOR YOU Snowflake’s revenue base of approximately $4 billion is notable — but its operating losses surpass $1.5 billion, and the company has yet to demonstrate that it can grow profitably. As markets stabilize and interest rates stay elevated, investors might start to question whether a business trading at over 100x free cash flow justifies such a premium. Historical Precedent: The 2022 Crash In 2022, when inflation surged and interest rates increased, speculative growth stocks plummeted. Snowflake’s shares fell by 72%, dropping from $401.89 (Nov 2021) to $113.30 (June 2022) — while the S&P 500 only decreased by 25%. Two years later, the stock has yet to regain its previous peak, recently trading around $260. That serves as a crucial reminder: when risk appetite diminishes, Snowflake does not behave like a stable cloud stock; it functions like a high-beta momentum asset. The Risk Factors That Could Hurt SNOW Big Tech Competition: Snowflake’s competitive edge is constantly challenged by Amazon’s Redshift, Google BigQuery, and Microsoft Azure Synapse — platforms capable of underpricing and integrating AI directly into their systems. Valuation Bubble: At 19x sales and with a negative P/E, Snowflake’s valuation already incorporates years of perfect execution. Even a slight slowdown in growth could lead to a drastic re-evaluation. Profitability Challenge: Despite generating $4 billion in annual revenue, Snowflake recorded a net loss of $1.4 billion and an operating margin of -37%. It is producing positive cash flow, but not enough to counteract ongoing losses under GAAP accounting. Security and Trust Concerns: Following a prominent data breach in 2024, Snowflake faces scrutiny regarding data governance — a significant concern for a company whose primary value proposition is secure data storage. Market Sentiment Risk: When enthusiasm for AI wanes or risk appetite diminishes, Snowflake might experience a similar kind of multiple compression that erased two-thirds of its value in 2022. What’s the Real Downside Risk? At its current price of approximately $265, Snowflake’s potential downside during a market correction could be considerable. If the scenario of 2022 repeats — and there’s no certainty it won't — SNOW could fall back below $130. This isn’t a doomsday forecast, merely a recognition of past events: under comparable macroeconomic stress, the stock dropped more than 70%. A recurrence of that situation would suggest a potential decline to around $130–$80, depending on the intensity of the market downturn. The Bottom Line Snowflake’s AI-driven narrative is thrilling, but its valuation is still alarmingly high compared to its profitability. The company continues to invest heavily in growth, its profit margins are significantly negative, and the competitive landscape is becoming more challenging.
