Following Snowflake's (NYSE: SNOW) fiscal third-quarter report late last month, analysts have been rushing to upgrade their 12-month price targets for the stock. The general sentiment from analysts seems to be that the quarter's results, combined with management's updated guidance, show signs that the company's trend of decelerating top-line growth is finally stabilizing.
Among the most bullish analysts are analysts at Evercore and Citi. These analysts both boosted their 12-month price targets for the growth stock from $195 and $191, respectively, to $235. Capturing how significant these targets are, they represent about 28% upside from where the stock is trading at the time of this writing.
Let's take a closer look at these analysts' bull cases and consider whether or not their rosy views for the data cloud platform company's shares make sense.
The bull case
Going into Snowflake's fiscal third-quarter update, there were concerns about the company's rapidly decelerating growth. Not only did Snowflake's revenue growth rate decelerate from a year-over-year growth rate of 69% in fiscal 2023 (the 12-month period ended. Jan. 31, 2023) to a growth rate of 37% in the second quarter of fiscal 2024, but the company repeatedly lowered its outlook for full-year product revenue throughout the fiscal year.
Considering this backdrop, it's not surprising that Wall Street responded optimistically when the company reported a year-over-year revenue growth rate for its product revenue in its most recent quarter that was well ahead of its guidance for the period. In addition, management even raised its outlook for full-year product revenue. These were reasons for the bulls to celebrate.
Adding credibility to the theses by the bullish analysts at Evercore ISI and Citi that growth trends are stabilizing at Snowflake, chief financial officer Michael Scarpelli confirmed in the company's fiscal third-quarter earnings call that this is the case.
"Consumption trends have improved," the CFO explained. "We are seeing stability in customer expansion patterns. Our guidance is based on observed patterns and assumes continued stability of consumption."
Though management's guidance for fiscal fourth-quarter product revenue to grow at a rate between 29% and 30% would mark a deceleration from the 34% product revenue growth the company reported in fiscal Q3, management said it now expects full-year fiscal 2024 product revenue to increase 37% year over year. This is up from guidance three months earlier for full-year fiscal 2024 product revenue to grow 34%. By raising its full-year guidance, Snowflake is winning back investors' confidence.
This stabilization in the company's business once again makes Snowflake's long-term product revenue outlook believable. Management has boldly forecast $10 billion in annualized product revenue by fiscal 2029, up from about $2.5 billion in product revenue for the trailing-12-month period.
The bear case
Despite Snowflake's encouraging business trends, the bear case for the stock is still potent: You could argue that the market was already pricing this in. After all, how else can you explain the stock's nearly $61 billion market capitalization despite the company continuing to report significant losses? Snowflake reported a net loss of more than $214 million on revenue of $734 million in fiscal Q3.
Though investors should be incrementally more confident in the company's long-term potential following Snowflake's fiscal third-quarter results and management's revised full-year product revenue guidance, there's still a lot of risk to owning shares at this valuation. I think a "hold" rating instead of a $235 12-month price target, is a more sensible rating for the stock.
Investors interested in the growth stock should consider being patient, waiting for a potential sell-off. This way, investors could buy Snowflake shares at a meaningfully lower price and thus reduce some of the risk of buying the stock at such a high valuation.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.
