Is It Time to Buy the Dip in Snowflake Stock?

This has has been an excellent year for many tech stocks. In fact, the tech sector of the S&P 500 is up over 30% this year.

But that doesn't mean there haven't been a few laggards. Snowflake (NYSE: SNOW) has been one of those tech companies that dramatically underperformed this year, with the stock plummeting over 30%.

But this could be an opportune time to buy Snowflake, as the lofty expectations that are built into many of its tech brethren don't exist with Snowflake.

Snowflake's growth is slowing down

Snowflake is a software company that is focused on what it calls the data cloud. Essentially, if you have a product that generates data, Snowflake is an excellent partner. Its products can help users efficiently store information, even if it's unstructured. It also has tools to utilize that data and scrape information to determine trends that can help steer a business direction. It can also be used to feed real-time information to various platforms to ensure that a business is using the most up-to-date information possible.

In an age of artificial intelligence (AI) that requires vast amounts of data to train models effectively, Snowflake is a vital software platform.

This translated into strong growth for Snowflake, as its product revenue rose 34% year over year to $790 million in the first quarter of fiscal year 2025 (ending April 30). It's also expected to grow product revenue around 26% to 27% to $808 million in the second quarter. Those two figures seem impressive in a vacuum, but the problem is they mark a significant growth deceleration that the market hates.

SNOW Revenue (Quarterly YoY Growth) data by YCharts

In the market's mind, Snowflake's revenue should accelerate due to companies wanting to collect data for various AI projects. However, many companies already subscribed to Snowflake's product or one of its competitors, so Snowflake's easy growth is likely over.

Now comes the much harder growth, where it must try to sway customers to onboard to its platform over a competitor's, which can be expensive.

When companies reach this stage, they are usually profitable. Unfortunately, Snowflake is a long way away from achieving this status.

Profits are a long way away for Snowflake

In Q1, Snowflake's gross profit totaled $556 million, meaning it has that much to work with after the expense of actually producing the software was factored in. However, Snowflake spent $905 million in various areas, making the stock massively unprofitable. This figure, known as operating profit (or operating loss in this case) , is a key metric to determine how close a business is to breaking even.

Snowflake isn't even close and isn't making much effort to reach that level.

SNOW Operating Margin (Quarterly) data by YCharts

However, a key difference is that operating margin includes expenses like stock-based compensation. It's technically a noncash expense because Snowflake can create shares out of thin air. This is why Snowflake is free-cash-flow-positive and part of how it turned an astounding 40% of its revenue into cash in Q1 (along with a sizable accounts receivable line item).

So, Snowflake could technically continue in this state forever because it isn't running out of cash. However, that would dilute shareholders and cause poor long-term returns. This isn't a big deal if Snowflake is growing at a rapid pace, but with its growth declining and profits not improving, investors have started to head for the exits.

This is part of the reason why Snowflake can be purchased at its lowest price-to-sales (P/S) ratio ever as a public company.

SNOW PS Ratio data by YCharts

So, what should investors do? If you're on the sidelines, I'd say buy a small portion to see how business improves. Snowflake has a new CEO at the helm, so the practice of high unprofitability and large stock-based compensation could be going away, although there hasn't been information on if this is happening. If that's the case, the outlook on the stock could improve and send it rocketing higher.

If you're already a shareholder, you're likely already down heavily. It would be wise to stick around for a few more quarters to see how the new CEO changes the business, as Snowflake's business could become a sleeping giant if it becomes profitable.

As a Snowflake shareholder, I'm willing to give the new CEO around a year to get the company moving in the right direction. If he doesn't, I may follow suit and sell, as the clock is ticking for Snowflake to turn a profit.

Keithen Drury has positions in Snowflake. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy .