Snowflake's Massive Losses Are Getting Worse

An investment in growth stock Snowflake (NYSE: SNOW) is a bet that the company can achieve impressive economies of scale as it grows. Today, the company regularly reports big losses. But investors hope that losses will shrink both in absolute terms and as a percentage of sales over time. Looking even further out, Snowflake bulls are betting that losses will eventually swing to significant profits.

But here's the problem: the data cloud company's latest results show losses getting much worse. Sure, Snowflake's top line is looking good. But what good is strong top-line growth if it's not helping the bottom line improve?

Image source: Getty Images.

Widening losses

On Wednesday afternoon, Snowflake reported revenue of $1 billion. This was up 26% year over year. The company's product revenue, which accounts for nearly all of Snowflake's revenue, also rose 26% year over year. This was well beyond management's guidance for product revenue to grow 21% to 22% year over year.

But, for Snowflake, high growth comes at a steep cost. For the quarter, operating expenses also grew 26% year over year and cost of revenue rose 28%. Putting these costs into perspective, when you add Snowflake's $1.14 billion in operating expenses to its $349 million in cost of revenue for the period, you get a figure that is $447 million higher than the quarter's total revenue. After adding in interest income and other expenses, Snowflake is left with a net loss of about $430 million for the quarter -- significantly greater than its net loss of $317 million in the year-ago quarter. Even worse, this net loss grew as a percentage of sales. Snowflake's net loss as a percent of sales in its most recent quarter was a staggering 41.2% -- higher than its 38.2% ratio in the year-ago quarter.

The company's high costs and big expenses, however, aren't necessarily a surprise. A step-up in spending has been a part of the company's growth plan since Sridhar Ramaswamy took the CEO position in early 2024. The company's aggressive spending has been largely aimed at capitalizing on opportunities associated with artificial intelligence.

"For expenses, our forecast assumes meaningful investments in our AI initiatives," said Snowflake chief financial officer Mike Scarpelli in a company earnings call in February 2024.

With Ramaswamy on the job for a full year now, we can see just how serious the new CEO is about ensuring the company is well-positioned in a world where customers are demanding more AI features. Clearly, he's willing to withstand even higher losses in the near term in exchange for long-term revenue growth and, hopefully, eventual scalability.

A high valuation demands excellent results

While Ramaswamy's approach to growth may be well-intentioned and possibly even the most efficient path to eventual profits, it poses a problem for investors in light of the growth stock's high valuation. With a market capitalization of about $60 billion, investors are already pricing in significant profits in the years ahead. Yet today the company is reporting quarterly losses that are nearing half a billion dollars. Put another way, the stock seems priced for perfection.

Trading at more than 15 times sales, the stock's current valuation leaves almost no room for error. Investors buying the stock, therefore, should have great faith in the future payoff of the company's big spending today. Additionally, they should have an extremely high risk tolerance.

The best advice, however, may be to avoid the stock entirely. Given the company's growing losses, this stock's high valuation is very difficult to justify. Investors, therefore, can likely find more appropriately priced investments for their capital.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.