Is it time to buy or sell?

Snowflake‘S (NYSE: SNOW) The stock plunged 15% on Aug. 22 after the company released its latest earnings report. In the second quarter of fiscal 2025, which ended July 31, the cloud-based data warehousing company’s revenue rose 29% year over year to $869 million, beating analyst estimates by $19 million. Adjusted net income fell 21% to $64 million, or $0.18 per share, but still beat the consensus forecast by two cents.

Snowflake beat Wall Street expectations, but declining customer retention rates, gloomy outlook and recent data theft weighed on the stock. The sudden departure of CEO Frank Slootman in February and Berkshire-HathawayThe recent exit from the stock casts even more dark clouds over the company’s future. Snowflake is now trading just below its IPO price of $120, but is it the right time to buy or sell the stock?

What does Snowflake do?

Large organizations often spread their data across a wide range of software, services, and computing platforms. This fragmentation can create inefficient “silos” and make data-driven decisions difficult. To remedy this, companies often direct their data to cloud-based data warehouses, which clean and organize all of this information so that it can be easily accessed by third-party data visualization and analytics apps.

Amazon, Microsoftand other leading cloud providers already integrate data warehouses into their own infrastructure platforms, but their services often tie their customers to their broader ecosystems. This is not an ideal solution for enterprises that rely on multiple cloud infrastructure platforms.

Snowflake addresses this problem by running its cloud-based data warehouse on Amazon Web Services (AWS), Microsoft Azure, and other cloud platforms. This flexibility, along with a usage-based pricing system that charges customers only for the storage and compute they actually need, was the initial impetus for growth.

Why is Snowflake stock melting?

Snowflake’s product revenue, which accounts for the majority of its revenue, grew 120% in fiscal 2021 (which ended January 2021) and 106% in fiscal 2022. Its net revenue retention rate, which measures year-over-year growth per customer over a 12-month period, also increased from 168% in fiscal 2021 to 178% in fiscal 2022.

These growth rates drew a stampede of bulls on Snowflake when the company went public on September 16, 2020. The stock doubled from its IPO price of $120 to $245 in its first trading, and eventually rose to a record high of $401.89 on November 16, 2021. At its peak, however, the company’s value reached $119 billion – or 43 times the revenue the company would generate in fiscal 2023.

These horrendous valuations set the company up for a steep decline as its revenue growth slowed. In fiscal 2023, product revenue still grew 70%, but the net revenue retention rate fell to 158%. In fiscal 2024, product revenue grew just 38%, while the net revenue retention rate fell to 131%. This slowdown continued last year.

Data source: Snowflake. YOY = year-to-year.

For the third quarter, Snowflake expects its product revenue to grow just 22% year over year. Analysts expect total revenue to grow 24% for the full year. Snowflake attributes this slowdown primarily to macroeconomic headwinds and insists that recent data leaks related to its databases have not significantly impacted its business. During the company’s Q2 2025 earnings call, CEO Sridhar Ramaswamy said the “problem is not on Snowflake’s side” and that the company has found “no evidence” that its platform was “attacked or compromised.” Instead, he blamed the breach on gaps in the cybersecurity of some of its customers.

Still, Snowflake’s margins continue to shrink as growth slows. In the second quarter, adjusted gross margins, operating margins and free cash flow (FCF) margins all shrank year over year – suggesting the company is losing pricing power in its niche.

Data source: Snowflake.

Snowflake expects its adjusted operating margin to fall to just 3% in the third quarter as the company increases its investments in research and development and go-to-market. Analysts expect a 37% decline in adjusted earnings per share for the full year as the company remains unprofitable under generally accepted accounting principles (GAAP). Those red numbers could limit the company’s profits as long as interest rates remain high.

Is it time to buy or sell Snowflake stock?

At $115, Snowflake stock still looks expensive when you look at 10 times this year’s revenue, and it probably won’t bottom out until revenue growth, retention rates and margins stabilize for a few consecutive quarters.

That’s probably why insiders have sold more than four times as many shares as they’ve bought over the past 12 months, and why Berkshire has been liquidating its stake this year. So I think it’s still smarter to avoid or sell Snowflake right now than to buy it.

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John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Leo Sun holds positions in Amazon and Berkshire Hathaway. The Motley Fool holds positions in and recommends Amazon, Berkshire Hathaway, Microsoft, and Snowflake. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Snowflake Falls Below Its IPO Price: Is It Time to Buy or Sell? was originally published by The Motley Fool