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Why Snowflake Stock Fell on Friday

The Motley Fool
The Motley Fool
 2022-01-21

What happened

Shares of Snowflake (NYSE: SNOW) slumped on Friday, closing down 4.2% for the day, after Deutsche Bank (NYSE: DB) cut its price target on the cloud-based data storage and analytics service from $400 to $375.

So what

Deutsche Bank's call was made as one part of a wide-ranging series of reductions in software stocks' price targets (but no actual downgrades). In addition to Snowflake, the banker cut its valuations on about a dozen different tech stocks today, including names such as Palantir Technologies , Salesforce , and Oracle .

As Deutsche Bank explained, it thinks that software stocks look set to rise "well from here," after a multiday Nasdaq sell-off. That being said, the bank believes it's time for investors to adopt "a healthy respect for the market and macro backdrop."

As inflation is rising, the Federal Reserve is signaling an intention to raise interest rates (making bonds more attractive versus stocks), and slim down its balance sheet (slowing the flow of new money into stocks, and potentially reversing the run-up in tech stocks over the past few years). So the prices investors are willing to pay to own unprofitable tech stocks such as Snowflake may come down.

Hence, the lower price target for Snowflake today.

https://img.particlenews.com/image.php?url=3zaEvA_0dsRcYwD00

Image source: Getty Images.

Now what

Although Snowflake certainly has some things going for it -- positive free cash flow , for example, and analyst predictions of a fivefold increase in revenue over the next four years -- according to generally accepted accounting principles ( GAAP ), Snowflake currently has no profits to speak of.

Indeed, analysts polled by S&P Global Market Intelligence don't see Snowflake reporting its first honest-to-goodness GAAP profit before 2027 at the earliest. Until Snowflake reaches that milestone, investors should probably expect its stock to remain volatile.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Palantir Technologies Inc., Salesforce.com, and Snowflake Inc. The Motley Fool has a disclosure policy .

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