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The Ratings Game: Snowflake stock skids toward worst drop on record, but analysts say that’s ‘overreacting’

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Shares of Snowflake Inc. were falling hard Thursday after the software company disappointed investors with its financial performance and outlook, but analysts seemed less quick to punish the company for what they viewed as short-term issues.

While Snowflake
SNOW,
-17.12%

topped fiscal fourth-quarter expectations with its overall revenue and product revenue, “investors were generally expecting the upside to be modestly higher,” according to Mizuho analyst Gregg Moskowitz.

He noted that Snowflake’s management team called out two factors—a slower rebound in consumption coming out of the holiday season and some “platform enhancements” related to a new warehouse scheduling service—as drags on revenue.

See more: Snowflake stock plunges after annual forecast underwhelms

The platform-enhancement component will continue to have an impact into the new fiscal year, according to Snowflake’s projections, but the company sees longer-term benefits. “While these efforts negatively impact our revenue in the near term, over time, they lead customers to deploy more workloads to Snowflake due to the improved economics,” Chief Financial Officer Michael Scarpelli said on Snowflake’s earnings call.

The stock is off 17.0% in Thursday trading and on track for its largest single-day percentage decline on record, according to Dow Jones Market Data.

Mizuho’s Moskowitz wrote that on the surface, the platform-enhancement change “is unquestionably a significant negative impact in FY23, and we understand investor disappointment stemming from a revenue reset.” Still, he said he was “not concerned” about the change.

While the platform enhancement “initially lowers consumption (by giving customers better price-performance),” Moskowitz agreed that the change could help in the long run. He noted Snowflake’s track record of success with admittedly smaller platform enhancements, as the company was ultimately able to achieve greater net revenue through those.

The enhancement could also get customers to adopt additional use cases on the platform, he wrote. Moskowitz kept a buy rating on the stock but cut his price target to $370 from $410.

Cowen & Co.’s Derrick Wood also saw Snowflake’s revenue issue as “transitory.”

“While the lower beat was unexpected…we think this is one-time in nature and reflects improvements to the platform and benefits to customers which should drive greater consumption,” he wrote. He deemed the stock-price decline Thursday a buying opportunity, calling out Snowflake’s “ability to sustain top-notch growth alongside inflecting profitability.”

He has an outperform rating on the stock but reduced his price target to $390 from $410.

Evercore ISI’s Kirk Materne said that investors were “overreacting” to the company’s forecast and the expected net revenue headwind related to the platform improvement.

“In our view, for long-term investors, the simple question is: is the near-term drag on revenue worth the long-term acceleration in customer adoption?” Materne asked. “If you are in the early innings of a massive market opportunity, the answer is: ‘of course’ as it helps SNOW take share from competitors and create greater network effects.”

He further wrote that “this pullback creates an opportunity to take a fresh look at one of the most unique growth stories in software,” while keeping an outperform rating but lowering his target price to $344 from $400.

FBN Securities analyst Shebly Seyrafi saw numerous positives in the company’s latest results, including “strong growth” in its count of large deals and traction for Snowflake’s data-sharing options, which he said are “a strong differentiator” for the company.

He has an outperform rating on Snowflake’s stock and lowered his price target to $300 from $300 Thursday, a move that he said reflected the recent decline in software multiples.

The stock has tumbled 36.4% over the past three months, while the SPDR S&P Software and Services exchange-traded fund
XSW,
-1.58%

has dropped 10.6% and the S&P 500 index
SPX,
-0.03%

has shed 3.5%.

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