Snowflake – How low will the share price fall?

On 22 May 2024, Nvidia (NASDAQ:NVDA) presented impressive quarterly figures. But it wasn't just the chip giant that impressed investors; Snowflake also impressed with strong revenue growth and an increased forecast. The share price rose by four per cent in US after-hours trading, only to return to its downward trend in the following days.

This is annoying for many investors, as the latest developments have left many of them in the red. At least Snowflake was able to report positive news with the publication of its latest quarterly figures:

Snowflake reported sales of USD 829 million in the first quarter, which represents a 33 per cent increase over the previous year. The company thus exceeded analysts' expectations of USD 787 million. However, earnings of 14 cents per share were below expectations of 18 cents.

Is that enough to stop the downward trend?

We think not. In June 2022, Snowflake had a good chance of forming a long-term low at $110.27. Initially, the price reacted very well to this level, but instead of an impulsive breakout, we have since seen a sideways-trending structure with a lot of overlaps. This usually indicates corrective structures and not a sustainable upward breakout.

Due to the strong sell-off and, above all, because the price has slipped below $138.40, we maintain our assessment that the stock only has a chance of forming a long-term low in the range of the purple box at $91.81 to $48.48 (please see chart below). Only there do we consider a purchase.



The final sell-off could continue directly. However, there could also be an interim recovery, which has room from the current price to the area of the red circle in the chart at $186.59 to $216.40. But even in this case, we remain of the opinion that the share will make a final downward movement to the purple box. But then the chances are good that Snowflake can run strongly upwards in the long term.

What is Snowflake's problem?

Investors were particularly focused on the growth in product revenue, which rose by 34 per cent to $790 million. The number of customers with product revenue of over a million dollars in the last twelve months increased by 30 per cent to 485. In addition, the number of ‘Forbes Global 2000’ customers grew by eight per cent to 709. The outstanding revenues recorded a growth of 46 per cent and amounted to five billion dollars. And that is exactly the main problem.

Based on this positive development, Snowflake raised its product revenue forecast for the second quarter from $785 million to $805 million to $810 million, representing year-over-year growth of 26 to 27 per cent. CEO Sridhar Ramaswamy emphasised the growing demand for cloud services and AI products as key factors. To strengthen its AI capabilities, Snowflake announced the acquisition of technology assets and key personnel from the AI monitoring platform TruEra.

While this is a promising outlook, it is likely to pay off only in the future. Unfortunately, we now have to wait until the stock completes its correction in the range we have forecast.

  
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