Why Snowflake Rallied Today to Start July

Shares of cloud-based data lake provider Snowflake (SNOW 4.95%) were in rally mode Monday even on a rather muted day for many tech stocks. Shares were up 4.8% as of 1:30 p.m. EDT.

Snowflake’s outperformance is likely due to a positive note issued by analysts at Goldman Sachs, who added the stock to the firm’s “Conviction List” today.

Goldman likes Snowflake’s entry point and innovation pipeline

Goldman analyst Kash Rangan added Snowflake’s stock to the firm’s “Conviction List” today. Rangan’s case is that he believes the recent weakness in the stock makes for an “attractive entry point,” given that the stock is down for the year, even while Rangan is optimistic about the company’s new CEO Sridhar Ramaswamy. Rangan believes Ramaswamy, who is a more product-oriented manager than the company’s previous head, can accelerate Snowflake’s innovation engine to thrive in the AI era.

Of note, Ramaswamy co-founded AI search start-up Neeva in 2019, which Snowflake acquired last year, bringing Ramaswamy into Snowflake. Since then, he’s been heading Snowflake’s artificial intelligence (AI) strategy, including the development of Snowflake Cortex, a fully managed service that simplifies using Snowflake for AI applications. At the end of February, he was appointed CEO as former CEO Frank Slootman stepped back into the chairman of the board role.

Can Snowflake grow into its valuation?

Prior to the Goldman note today, Snowflake was about $135 per share — not too far off from its $120 initial public offering (IPO) price back in September of 2020, nearly four years ago.

It’s not that Snowflake the business hasn’t performed well. Last quarter, core-product revenue surged 34%, and remaining performance obligations, which take into account new capacity to be consumed and recognized by Snowflake in future periods, accelerated 46%. Net retention, meaning how much existing customers used last quarter compared to the prior-year quarter, came in at a healthy 128%.

Still, there are worries. Management has guided to just 24% product-revenue growth for the full fiscal year, implying a deceleration. RPO was a bright spot relative to a year ago but actually slightly down from the prior quarter. And a net-retention rate of 128% actually marks a continued deceleration and the lowest figure in Snowflake’s history as a public company.

With Snowflake having traded extremely expensively its entire life as a public corporation, it’s still not particularly cheap at 15 times sales. So while Rangan may be looking at Snowflake’s stock being down near its IPO price as a good entry point, keep in mind the stock is not particularly cheap overall. The new CEO will have to be able to reaccelerate growth through AI innovation in order for the stock to have material upside.

Billy Duberstein and/or his clients have no positions 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.

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