Has Snowflake’s stock bottomed out?

While many tech and AI stocks have soared this year, Snowflake (SNOW 4.23%) it goes in the opposite direction. Down 43% year-to-date, the cloud computing stock has severely underperformed the market — S&P 500 increased by 17% this year.

Snowflake’s business has faced several headwinds this year. It was embroiled in a data breach, and investors weren’t thrilled with a CEO shakeup a few months earlier — the stock still hasn’t recovered from that.

But given that Snowflake’s stock has been a little more stable of late and its recent results haven’t been all that bad in terms of growth, could the stock have bottomed out? Is now a good time to add Snowflake to your portfolio?

Recent findings suggest that data breaches don’t hurt business

On August 21, Snowflake reported second-quarter results, which rose to the end of July. The company’s revenue for the quarter totaled $868.8 million, up 29% year over year. While the company’s growth rate continues to steadily decline, there isn’t a huge drop to suggest it’s facing headwinds from the data breach that occurred earlier this year.

SNOW Revenue Data (Quarterly Yearly Growth) by YCharts

Snowflake CEO Sridhar Ramaswamy told CNBC’s Jim Cramer that despite the bad publicity, data breach concerns are overblown. “These titles, and that’s what they are, haven’t really affected our core business with existing or new customers.”

While it may be positive to see that the breach did not adversely affect the company’s data storage business, Snowflake’s growth rate is still slowing, and this may not bode well for growth-oriented investors.

Snowflake’s bigger problem might be with the bottom line

A growth rate of nearly 30% could make Snowflake a good stock to buy — if it weren’t for its brutal losses. In the last quarter, the company’s net loss totaled $317.8 million, which is 40% higher than the $227.3 million it incurred in the year-ago period.

What is particularly alarming to me is the CEO’s response to the slowdown in growth. In Ramaswamy’s interview, he told Cramer, “We’re investing in our future, whether it’s engineering or sales, to sell the product more.” It’s the last part of this quote that worries me that, like many executives, Ramaswamy’s response is to hire more sales reps and spend more money on sales activities to grow the business.

Currently, the company’s sales and marketing expenses account for 46% of its revenue. And research and development represents another 50%. At such high percentages of revenue, it will be incredibly difficult for Snowflake to ever achieve profitability, especially if the solution to growing its business is to spend more on sales and marketing.

Snowflake’s stock could fall further

While Snowflake’s sales haven’t gone over a cliff in the last quarter, that doesn’t mean the business is on the right track. If its growth rate continues to deteriorate, and perhaps on the back of a recession, there may be little reason to invest in the business right now, as its high-spending ways mean its losses could grow even higher in quarters future

Without some hope of profitability on the horizon, I wouldn’t take a chance on this tech stock. Although its valuation is lower, it still trades at 12 times earnings and nearly 10 times book value. Snowflake trades at a sizable premium, and that’s hard to justify given the challenges the business is currently facing.