1 Growth Stock Down 71% to Buy Right Now

Data analytics and warehousing company Snowflake (NYSE: SNOW) went public as one of the most popular IPOs in modern history. But today? Investors have largely moved on. Snowflake is down 71% from its former peak, which of course came in 2020-2021 during a market bubble driven by zero percent interest rates.

But Snowflake’s story doesn’t reflect a bad deal, even if the stock price action points to that conclusion.

The good news is that Snowflake has now fallen far enough that it could completely change the stock’s long-term investment outlook. Here’s why it’s finally time to buy Snowflake.

A Tragedy: An Evaluation Story

Snowflake was an extremely popular IPO, which made it a successful one. After all, the purpose of an IPO is to raise money that a company can use to grow the business. Snowflake reached a frenzy on Wall Street; there seemed to be no price investors weren’t willing to pay for the stock.

At its peak, investors paid an enterprise value (EV) to revenue ratio of nearly 216. That’s not a Snowflake earnings ratio — that’s revenue! For reference, the lauded AI stock, Nvidiawhich some have argued is in a bubble of its own, has not topped 45 in this ratio during this AI frenzy. Investors can think of valuations as expectations; the reality is that Snowflake’s early valuation set the bar impossibly high. He seems to have doomed the stock from the start.

You can see above how Snowflake’s valuation has completely written off over the past four years due to a combination of share price declines and earnings growth that have contributed to the decline in this valuation ratio. The good news is that Snowflake is a much better opportunity today, trading at an EV-to-earnings ratio of just 11. Snowflake’s current valuation isn’t even at the top of the market today; is well below that of other hot software stocks such as CrowdStrike (17) and Palantir (31).

Tremendous long-term growth potential

Snowflake is a data software company. Its platform enables companies to securely store, organize, share and query data. Companies want a firm understanding of their data as they move toward artificial intelligence (AI), which uses data to train and deploy AI technologies. The Snowflake product is cloud neutral, which appeals to the many businesses that don’t want to tie themselves into one cloud or another.

While Snowflake’s revenue growth has slowed from a triple-digit rate to below 30% in recent years, investors shouldn’t panic. Snowflake’s usage-based pricing and rate hikes created a challenging environment for customers to cut back on spending. The underlying growth numbers look healthy: Snowflake still boasts a 127% revenue retention rate among existing customers, and last quarter the company’s customer base grew 21% from a year ago. It doesn’t look like income growth should slow much further from its current pace.

The story continues

Meanwhile, the long-term opportunity is tremendous. Management estimates its addressable market was worth $153 billion last year and will grow to $342 billion by the end of 2028. The company’s trailing 12-month revenue is $3.2 billion, just about 1% of this number in the long run. Snowflake has a direct competitor, a private company called Databricks, but there are plenty of opportunities to feed both companies in the coming years.

Pitch to buy shares today

Investing often comes down to potential risks versus rewards. Today, Snowflake’s business is bigger than ever, and the stock’s valuation is nowhere near the top of the market.

Right now, Snowflake’s financial losses are the most important risk for investors. The company has lost more than $1 billion in the past four quarters. For some, investing in an unprofitable business may not be for you. However, these are GAAP losses, and Snowflake has a very positive cash flow. The company’s trailing-12-month free cash flow of $815 million represents 25% of revenue. High stock compensation largely explains the losses and is part of the life of tech companies bidding for top talent.

Ultimately, the company must demonstrate that it can overcome these expenses and become GAAP profitable. For now, Snowflake is extremely cash-flow positive and well-funded, with $3.2 billion in cash and zero debt, so the financial risk isn’t as bad as it might seem. Snowflake has time and so do investors.

Snowflake’s strong earnings retention and tremendous market opportunity give it enough potential for investors to consider the stock at a valuation that finally gives it a chance to shine.

Should you invest $1,000 in Snowflake right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike, Nvidia, Palantir Technologies and Snowflake. The Motley Fool has a disclosure policy.

1 Growth Stock Down 71% to Buy Right Now was originally published by The Motley Fool