Best Stock: A former high flyer that's coming back into favor because of improving fundamentals

Snowflake (SNOW) has been added to Ritholtz Wealth Management's "Best Stocks in the Market" list following a strong earnings report, signaling a potential turnaround after a significant decline from its post-IPO high. The company's recent performance shows revenue growth of 4%, EBIT growth of 74%, and EPS growth of 13% year-over-year, with a net revenue retention rate of 124% and an increase to 606 customers paying over $1 million annually. While not yet profitable on an operating basis, improving fundamentals and growing gross margins suggest a path toward profitability, potentially driving further stock appreciation, though traders are advised to watch for pullbacks to the $190 level as a possible entry point.

Analysis

Snowflake (SNOW) has re-emerged as a stock of interest, evidenced by its inclusion in Ritholtz Wealth Management's "Best Stocks in the Market" list following a notable earnings report that signaled a potential turnaround. The latest quarterly results showed year-over-year revenue growth of 4%, a significant 74% increase in EBIT (operating earnings), and a 13% rise in EPS, beating analyst expectations. This financial improvement is complemented by strong customer metrics: the count of clients contributing over $1 million in annual revenue rose 27% YoY to 606, and the net revenue retention rate reached a robust 124%, indicating increased spending from existing customers. Gross margins have expanded to 67% from 59% in 2021, bolstering the company's trajectory towards its profitability targets, although SNOW is not yet consistently profitable on an operating basis. The stock, after its high-profile IPO at $120 and a surge to an all-time high of $401.89, experienced a sharp decline to $107 in September 2024, but has since doubled from these lows, though it remains roughly 50% below its peak. A strategic management change, elevating the head of AI, underscores its focus on this growth area. Technically, SNOW's stock has rallied to its February highs, with $190 identified as a critical support/resistance level and its moving averages showing signs of bottoming, suggesting a potential shift to an uptrend. This occurs within a supportive market for software stocks, with the IGV ETF outperforming the Nasdaq 100 over the past year.

Key Decisions for Investors

• Investors should evaluate Snowflake's improving financial trajectory, particularly the strong 74% YoY EBIT growth and 124% net revenue retention rate, against the more modest 4% YoY revenue growth in the latest quarter, assessing if the operational leverage and customer expansion can drive sustained profitability and bridge the valuation gap to its historical highs.
• Traders observing the stock's recent sharp rally to February highs might consider the $190 level as a key pivot point for potential entries on constructive consolidation, with a defined risk management strategy using the $175-$180 area as a stop-loss.
• Long-term oriented investors could monitor the company's progress towards achieving consistent operating profitability and the upward turn of its 200-day moving average (currently $160) as potential positive signals, while remaining cognizant of the stock's inherent volatility and the competitive landscape in cloud data services.