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With shares of data cloud technology company Snowflake (NYSE: SNOW) getting hammered this week following its fiscal second-quarter earnings report, some investors may be wondering if this is a good opportunity to buy the dip in the growth stock. After all, shares are not only down more than 40% over the last 12 months, but they are trading far below the $245 price the stock started trading at on its public debut in 2020.
But investors shouldn't let a falling stock price fool them into automatically concluding the data cloud platform provider's shares are a bargain. A close look at Snowflake's earnings report reveals several major concerns about the company -- particularly in the context of the stock's sky-high valuation.
Slowing growth
Reacceleration in product revenue (about 95% of total revenue) earlier this year didn't last long. The company, which provides a platform for companies to access, manipulate, and share their data in a unified and seamless digital environment, reported a product revenue growth rate of 34% in the first quarter of fiscal 2025, up from 33% in the quarter ended three months earlier. But this key metric fell to 30% in Snowflake's just-reported quarter.
If it wasn't for one more disappointing data point when it comes to Snowflake's growth, investors could likely forgive the company for a slight slowdown in its high growth rates. But the following key metric was particularly disappointing in the context of the company's growth story. Management guided for just 22% year-over-year growth in fiscal third-quarter product revenue.
The problem with this slowing growth and management's top-line guidance is how it looks next to the stock's frothy valuation. As an unprofitable tech company trading at 13 times sales, investors should be holding Snowflake's business performance to a high bar. A slowdown like this could cause investors to lose faith in the company's ability to scale over time and become profitable enough to justify such a rosy valuation.
Huge losses
Perhaps even more concerning is the company's discouraging bottom line. Snowflake's net loss of about $318 million for the quarter not only widened on an absolute basis from the year-ago quarter's loss of approximately $227 million, but it grew as a percentage of total quarterly revenue. The net loss in the second quarter of fiscal 2025 equaled more than 36% of revenue. This compared to 34% of revenue in the year-ago period.
This was driven by a step-up in the cadence of the company's investments in research and development spending, marketing, and the purchase of high-tech chips to power its platform.