As of 12:56 p.m. ET, shares of Snowflake (NYSE: SNOW), a hypergrowth cloud data platform, were down 4.9% after sliding as much as 7.4% in early morning trade.
The company’s operational performance or recent news don’t seem to be the cause of the sell-off; in fact, shares jumped last week on Snowflake’s better-than-expected second-quarter earnings announcement.
But that might be what caused the fall today. Investors might be dumping recent earnings season winners and buying other equities that fell sharply the previous week in response to the Federal Reserve chair’s hawkish remarks. Additionally, long-term interest rates increased this morning, which adversely affects no-profit, high-growth stocks like Snowflake.
Following a better-than-expected earnings report last week, Snowflake shares increased by more than 20%. Snowflake’s sales specifically increased by 83% to $497 million in the second quarter, exceeding analyst forecasts, and management increased full-year guidance.
The positive trend in the markets, which had a dreadful week, was challenged by Snowflake’s fantastic week. Following remarks from Fed Chair Jay Powell at Jackson Hole that suggested the need for higher interest rates, the tech-heavy Nasdaq Composite plummeted over 4% on Friday alone. In order to acquire money or purchase other stocks that sharply declined last week, investors may be selling Snowflake today. Since there was no company-specific news today, this seems likely.
Despite having one of the highest revenue growth rates in the software sector, Snowflake’s stock is one of the most expensive, trading at 37 times sales. In addition, the business continues to lose money while investing in expansion.
Long-term interest rate increases typically have a detrimental impact on equities like Snowflake. Today saw an increase in both oil prices and the yield on 10-year Treasury bonds, which went from 3.035% to 3.12%. When long-term interest rates rise, investors may lower the price they demand now for the same future cash flows by increasing the rate at which they discount future stock earnings. Rising long-term rates therefore have a particularly negative impact for high-growth stocks, with Snowflake serving as its mascot.
It makes sense that Snowflake is currently falling more than the market given that profit-taking is likely occurring and the increase in long-term rates.
As indicated by its enormous growth rate, Snowflake continues to be one of the market’s most intriguing stocks. Remember that the data cloud provider has a unique business strategy that charges clients depending on usage rather than a set annual fee.
This may be the reason Snowflake outperformed its software-as-a-service competitors this earnings season, despite the fact that several of them reported a decline in new business. These days, committing to a fixed subscription for a year or longer may seem more difficult than paying depending on usage, which customers can manage. Thus, both Snowflake’s strategy and the usage-based cloud infrastructure firms’ model may prove useful when prudence is required.
Even still, volatility is expected to hammer Snowflake investors as they struggle with the company’s exceptional operational performance and exorbitant valuation. No matter how well the company works, there may be a limit to how far Snowflake can advance in an era of greater inflation and rising interest rates.
The stock might increase once more if inflation sharply declines and interest rates go back to their lower pre-pandemic levels. In spite of this, investors should be ready for significant swings in either way given the macroeconomic uncertainty.
