Good companies occasionally encounter bad circumstances. Just look at application software specialist Snowflake (NYSE:SNOW). As a cloud-computing data storage and analytics powerhouse, Snowflake should know everything there is to know about cloud networks, particularly regarding aberrant data volume and cyber breach vulnerabilities. However, a data-compromising event that impacted hundreds of customers suggests otherwise. Reputationally, it doesn’t look good for Snowflake. Not surprisingly, Wall Street threw SNOW stock out into the alley for a good old-fashioned beatdown.
However, when drilling into the details, it’s not entirely clear that the underlying enterprise was wholly at fault. It shouldn’t be let off the hook, but the severe meltdown in the share price seems like an overreaction. For contrarian investors, you can probably sense where I’m going with this. Snowflake’s business has been robust and is projected to remain robust relative to the core application software industry. As a result, I am bullish on SNOW stock.
Why Is SNOW Stock Taking the Heat?
As alluded to earlier, Snowflake appears loosely responsible for a data breach incident. Given the terrible costs associated with such attacks, Wall Street quickly exited out of SNOW stock.
According to TipRanks reporter Vince Condarcuri, a nefarious agent labeled as a “financially motivated threat actor” stole a “significant volume of records” from approximately 165 Snowflake customers.
In response, Snowflake’s Chief Information Security Officer, Brad Jones, stated that the company is collaborating closely with affected customers and intends to mandate advanced security controls like multi-factor authentication (MFA),
However, it’s important to note that the data breach didn’t stem from Snowflake’s enterprise environment. Rather, the compromising event occurred because of lax protocols on the part of customer credentials.
As more details poured in, analysts appeared to identify a culprit: single-factor authentication (SFA) as opposed to multi-factor authentication (MFA). With the former, anyone that gains access to login and password information – for example, via malware – can illicitly download privileged or protected data. However, MFA requires an additional step – such as a random code sent via a text message or an authenticator app – even with the login/password.
That’s not to say that SNOW stock shouldn’t absorb some penalty here. After all, the underlying company is in the business of data analytics. It should have noticed aberrant data impacting the users of its environment. In this age of a fractured social paradigm, it’s always good to do your fellow human beings a favor – especially when those human beings are your customers.
Still, the bottom line in a technical sense is that, yes, SNOW stock was probably always going to fall. However, where the matter becomes debatable is the magnitude of the penalty. The bullish argument is that the downside has gone on too far for an incident that’s not directly tied to Snowflake’s environmental security measures.
Valuation Appears Enticing for Contrarians
While longtime stakeholders won’t appreciate the red ink, the silver lining may be as follows: the volatility opens a door for contrarian investors. Over time, if market participants recognize the opportunity, SNOW stock may see an upward trajectory.
Much of the confidence centers on the relative valuation of SNOW stock. To be sure, on an absolute basis, Snowflake would not be considered to be discounted. Presently, its shares trade at a trailing-year sales multiple of 13.95x. In contrast, the application software industry runs at a revenue multiple of 3.8x.
However, during the quarter ended July 31, 2023, SNOW stock carried a sales multiple of 25.18x. Compared to that paradigm, the software specialist seems enticing. What’s more, the company’s growth rate has been impressive and may continue to be impressive.
In the past five years, Snowflake’s annual sales growth rate averaged 101.75%. Of course, no enterprise can sustain such growth indefinitely. However, analysts, on average, believe that from the current year to Fiscal 2029, the business’s top line could expand by an annual average of 26.14%.
For context, Verified Market Research believes that the application development software market may expand at a compound annual growth rate (CAGR) of 14.7% from last year to 2030. Snowflake is easily projected to beat this growth estimate.
Now, Grand View Research forecasts a higher magnitude, anticipating the sector could expand at a CAGR of 24.3% between 2021 to 2028. Even so, Snowflake might pip it, and that’s the consensus projection. On the high-side projection, the annual growth rate could average 45.54%.
The bottom line is that SNOW stock seems like a great deal to pick up on the dip.
Is SNOW Stock a Buy, According to Analysts?
Turning to Wall Street, SNOW stock has a Moderate Buy consensus rating based on 25 Buys, eight Holds, and one Sell rating. The average SNOW stock price target is $201.74, implying 54.4% upside potential.
The Takeaway: The Volatility in SNOW Stock Is an Overreaction
With the market representing the ultimate arbiter in price, I don’t want to be so presumptuous as to assume that Snowflake is “incorrectly” priced. However, given the sharp volatility of SNOW stock for a matter that’s not directly tied to the underlying cloud environment, the reaction seems harsh. More importantly, analysts agree that Snowflake’s growth trajectory will likely outpace projections for the underlying application software ecosystem. As a result, SNOW appears to be a contrarian buying idea.
