What Happened:

Shares of data warehouse-as-a-service Snowflake (NYSE:SNOW) fell 24.9% in the morning session after the company reported fourth-quarter results and provided product guidance for Q1, which missed analysts' estimates. In addition, net revenue retention continued to decline. Snowflake attributed some of the challenges to significant holiday impacts in December and January, a recurring challenge for predicting consumption patterns. Consequently, understanding consumption trends proved difficult, with trends yet to revert to pre-FY'24 levels. As a result, these concerns were baked into the product growth guidance, with management expecting "increased revenue headwinds associated with product efficiency gains, tiered storage pricing, and the expectation that some of our customers will leverage Iceberg Tables for their storage." 

Another significant negative that is adding to the stock's weakness is the announcement of CEO Frank Slootman's retirement. Slootman is a highly-respected tech executive who guided Snowflake through its public offering. Before that, he was CEO of ServiceNow (NYSE:NOW), a company he also shepherded through the IPO process. On the other hand, Snowflake delivered strong free cash flow while still growing revenue at 30%+, which is certainly an impressive feat.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Snowflake? Access our full analysis report here, it's free.

What is the market telling us:

Snowflake's shares are very volatile and over the last year have had 25 moves greater than 5%. But moves this big are very rare even for Snowflake and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The previous big move we wrote about was 9 days ago, when the company dropped 5.3% as equities pulled back, with market participants likely taking profits ahead of a big earnings week. Tech stocks led the decline, with the Nasdaq index down 1% while the SP 500 fell 0.5%. Some of the notable stocks reporting earnings during the week include Walmart (NYSE:WMT), Booking Holdings (NASDAQ:BKNG), and Nvidia (NASDAQ:NVDA). 

Stocks have had a good run since the fourth quarter of 2023 as markets expect the Fed to begin cutting rates as early as the first half of 2024 amidst cooling inflation data. The market's momentum continued into the early weeks of 2024 following solid earnings results from big tech names, including Meta (NASDAQ:META), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT). 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.

Snowflake is down 1.7% since the beginning of the year, and at $186.11 per share it is trading 21.1% below its 52-week high of $236 from February 2024. Investors who bought $1,000 worth of Snowflake's shares at the IPO in September 2020 would now be looking at an investment worth $732.17.

Today’s young investors won’t have read the timeless lessons in Gorilla Game: Picking Winners In High Technology because it was written more than 20 years ago when Microsoft and Apple were first establishing their supremacy. But if we apply the same principles, then enterprise software stocks leveraging their own generative AI capabilities may well be the Gorillas of the future. So, in that spirit, we are excited to present our Special Free Report on a profitable, fast-growing enterprise software stock that is already riding the automation wave and looking to catch the generative AI next.