Snowflake stocks continue to melt. Is it time to buy the dip?

A difficult year for Snowflake (SNOW 1.85%) investors only got worse after the cloud data storage company’s second-quarter results disappointed investors. The stock immediately fell 15% in the session after its earnings announcement and is now down more than 40% on the year.

Let’s take a closer look at the company’s Q2 earnings report and judge whether investors should consider buying the stock short.

Good growth, but not good enough

Part of Snowflake stock’s struggling performance this year stems from the company’s involvement in a cybersecurity attack that allowed hackers to access customer data. If the company had hoped that its second-quarter results would help ease investor concerns that the incident would not impact its business, that did not appear to be the case.

Overall, Snowflake’s second-quarter results were quite strong, with revenue up 29% to $869 million and beating analysts’ consensus of $851 million. Produced revenue, meanwhile, rose 30% to $829 million.

The company’s loss per share, however, widened in the quarter from $0.69 to $0.95. Its revenue was also lower than it was in Q1, and product revenue growth slowed from 34% last quarter.

Management said its innovation pipeline is accelerating and that it brought more products to market in the first half than it did for the entire year in 2023. Meanwhile, it said more than 2,500 accounts use Snowflake AI weekly.

Snowflake spent $400 million to buy back stock this quarter. It ended the period with $3.9 billion in cash and short- and long-term investments and no debt. It has a $2.5 billion buyback program in place until the end of March 2027.

Looking ahead, Snowflake drove annual product revenue of approximately $3.36 billion, representing 26% year-over-year growth. This is an increase from a previous forecast of $3.3 billion. Gross product margins of 75%, operating margins of 3% and adjusted free cash flow margins of 26% are still expected.

As for the cybersecurity attack, Snowflake said the breach was on its customers’ side and not on its side. As a result, it said the incidents did not affect consumption or its financial results. Going forward, however, the company will require its customers to use multi-factor authentication for all users.

Image source: Getty Images.

Is it time to buy a discount in stock?

There are a few reasons why Snowflake is struggling. The cyber security incident, whether it was his fault or not, didn’t help. Meanwhile, the company’s valuation has clearly moved forward. But perhaps the biggest reason is the belief that data warehousing is a business that will be disrupted by artificial intelligence (AI), with AI being used to analyze structured data.

More likely, data warehousing will remain the more cost-effective method, and AI will be more of an adjacent opportunity for the business. However, until proven otherwise, this could remain a surplus over the stock.

From a valuation perspective, however, the company now trades at a much more reasonable price. Its forward price-to-sales (P/S) multiple based on next year’s estimates has fallen from around 20 times at the start of the year to now below 9 times.

SNOW PS report data (1 year ago) by YCharts

For a high-margin business growing 25% to 30% per year, this is an appropriate multiple. However, the company needs to maintain that growth rate to keep that multiple as well.

At this point, I think the Snowflake looks quite appreciated now. That said, given the stock’s struggles this year, I’d like to pick up the stock when it’s in the bargain bin and isn’t there yet despite the selloff.