SNOW Stock’s Stormy Forecast: Why Cautious Investors Should Wait for a 20% Dip

Snowflake (NYSE:SNOW), which specializes in software for cloud-based data warehousing, was recently overvalued. I tried to warn investors about Snowflake’s trailing price-to-earnings ratio and suggested that SNOW stock was vulnerable to a pullback. That pullback came to pass, but it’s still not the right time to take a share position.

Sure, Snowflake as an artificial intelligence connection and, as we’ll see, the company’s quarterly financial results were pretty good. Yet, due to a surprising event and Snowflake’s soft forward guidance, the market might punish the company for a while longer. Therefore, it’s wise to let Snowflake continue falling before taking a share position.

SNOW Stock Tumbles After CEO’s Departure

There are a couple of identifiable reasons who SNOW stock slumped from $236 to below $160 in recent weeks. One reason is that the market evidently didn’t expect Snowflake CEO Frank Slootman to step down from the role immediately at the end of February.

Sridhar Ramaswamy has already replaced him, but there’s still uncertainty about why Slootman left so abruptly. A Deutsche Bank analyst succinctly expressed the market’s concerns on this matter.

“It is no doubt concerning to see Mr. Slootman, who has a strong track record and is well regarded by investors, step down after five years in the role,” they wrote.

Furthermore, Bernstein analyst Mark Moerdler wondered (per Bloomberg) “if the sudden change was due to recent disappointments in the company’s revenue growth.”

Speaking to Barron’s, Slootman called the idea that he retired due to Snowflake’s poorly received financial guidance “an absurd notion.” But then, would Slootman actually admit it if he were worried about Snowflake’s financials?

Snowflake’s Soft Guidance Adds to the Uncertainty

There’s already uncertainty surrounding Snowflake’s CEO change. After all, the market doesn’t yet know if Ramaswamy will be an effective chief executive.

Along with that, Snowflake’s current-quarter financial guidance added to the sense of uncertainty. Specifically, the company guided for current-quarter product revenue of $745 million to $750 million. In contrast, Wall Street called for product revenue of $768 million.

Snowflake predicted full-year fiscal 2025 product revenue of $3.25 billion. This guidance falls short of the analysts’ consensus estimate of $3.43 billion.

Bloomberg called product revenue a “closely watched measure” for Snowflake. Hence, this helps to account for the steep drop in SNOW stock. Besides, after the previous share-price rally, investors may have been ready to take profits on their Snowflake shares.

SNOW Stock: Let It Continue to Fall, Then Make the Call

Some experts, like Macquarie analyst Frederick Havemeyer, may “see an opportunity to enter the story” with Snowflake stock. I’m not convinced, though. After the CEO-departure and soft-guidance shocks, the market may continue to punish Snowflake for a while longer.

It’s wise, therefore, to monitor Snowflake’s future news releases and stay on the sidelines. The most prudent strategy is to let SNOW stock fall another 10% before buying shares. If you’re very cautious, let it come down 20%. That way, the risk-to-reward balance will be more favorable for investors.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.