Could earnings bring Snowflake’s share price in from the cold?

Snowflake’s [SNOW] share price has melted fast since the turn of 2021, despite surging demand for its services during the coronavirus pandemic.

Snowflake’s share price debuted at $245 per share on 16 September last year, and rose as high as $390 at close on 8 December. By 13 May, it had plummeted 51.7% to $188.24.

Snowflake’s share price has been hit by the expiration of lock-up periods post-IPO and analysts fretting over its lofty valuation. In January, financial insights company Trefis said the Snowflake stock traded at 75 times projected 2022 revenues, well above the broader internet software sector of circa 15 times.

In addition, Snowflake’s share price has suffered alongside other tech growth stocks due to the threat of higher interest rates and inflation.

Snowflake’s share price has made a recovery recently, climbing 24.3% from its mid-May low to $233.92 at close on 24 May. However, the stock is down 16.9% so far in 2021.

Investors will be poised to see if Snowflake’s share price will continue to melt following the company’s first-quarter results announcement on 26 May.

How could earnings impact Snowflake’s share price?

Snowflake’s fourth-quarter revenues soared 117.2% to $190.5m, but analysts were underwhelmed by first-quarter revenue forecasts of between $195m and $200m.

According to Zacks Equity Research, first-quarter revenues are likely to beat company forecasts, coming in at $210.7m.

Zacks said the company is likely to have benefited from the ongoing transition from cloud-based repositories and on-premises data centres to its Data Cloud platform, reported Yahoo Finance.

It added: “Growing exposure to the data warehousing market and an expanding enterprise customer base are expected to have driven top-line growth.”

Blair Abernethy, an analyst at Rosenblatt Securities, upgraded his target price from $225 to $285 earlier this month and expects first-quarter revenues of $209m.

“Given the healthy IT spending environment so far this year, the accelerating digital transformation trends, and the strong first-quarter performance from the leading cloud service providers, we expect Snowflake to meet and possibly exceed our 93% year-on-year product revenue growth estimate,” Abernethy wrote in a note seen by TheStreet.

"We expect Snowflake to meet and possibly exceed our 93% year-on-year product revenue growth estimate" - Blair Abernethy, Rosenblatt Securities analyst

Zacks expects the acceleration to continue in the months ahead, with full-year revenues set to hit $1.09bn, up 84.2% year-over-year.

Trefis analysts are also confident about the long-term. “Cloud-based data warehousing is clearly the future, as organisations transition from storing data on on-premise servers and costly hardware to cloud-based offerings that are more cost-effective and scalable,” it stated.

“Snowflake is particularly well placed in the space, as its product works across cloud platforms and separates storage from computing for billing purposes. It is also, apparently, easier for customers to use… It is likely to grow into its lofty valuation relatively quickly.”

It added that Snowflake estimates its total current addressable market sits at circa $81bn, far above current revenues.

“Snowflake’s business model is also consumption-based, rather than being fixed fee, unlike many other [software-as-a-service] names, giving the company a lot of upside as data and query volumes rise for customers,” Trefis added.

"Snowflake’s business model is also consumption-based ... giving the company a lot of upside" - Trefis

According to MarketScreener, analysts have a consensus outperform rating on Snowflake stock and an average target price of $285.38.

There are challenges ahead for Snowflake’s share price, such as competition from rivals including Teradata [TDC], Amazon [AMZN] and Google [GOOGL], and a potential dip in spending from sectors badly hit by the pandemic, including retail.

“Snowflake could be meaningfully, negatively impacted by the continued reopening of the economy,” said Larry Ramer, writing for InvestorPlace. “After all, with the work-from-home trend weakening, companies may not have as much need to keep and analyse data in the cloud now as they did at the beginning of the year.”

Trefis analysts warn that there are still concerns over Snowflake’s high valuation — currently $67.38bn — and as such, there is little room for error. “If Snowflake’s growth falters for any reason, the stock could see a significant correction,” it stated.

The stock is held by the First Trust Cloud Computing ETF [SKYY], which has climbed 42.9% in the 12 months to 24 May’s close. It is also held by the SPDR S&P Internet ETF [XWEB], which is up an impressive 79.8% in the same period.