1 Growth Stock Down 68% to Buy Before Its Turnaround, According to Wall Street

Snowflake (NYSE: SNOW) went public in late 2020, and its shares peaked during the tech sector's pandemic-era surge in late 2021. The stock has since declined by about 68% from that record high, but Wall Street sees a turnaround on the horizon. Among the 45 analysts who follow the company, the median price target is $169 per share -- 33% higher than its current share price of $127.

Leaning into demand for AI products

Snowflake's cloud-based platform lets customers integrate, store, transform, and make sense of their data. It also has a marketplace for data sharing and monetization, creating a network effect that makes the platform increasingly useful as more clients participate. Importantly, its architecture is cloud-agnostic -- the platform runs on all of the major cloud infrastructure providers' systems. That distinguishes Snowflake from the analytics solutions provided by Amazon and Microsoft.

Snowflake was one of many high-growth technology stocks that soared during the market mania of 2021, then crashed back down to Earth during the bear market of 2022. More recently, the stock has continued to struggle as investors have reacted to news of a hacking incident that affected more than 160 of its clients, the retirement of CEO Frank Slootman, and concerns about the company's investments in artificial intelligence (AI).

However, with the stock down so far, it's worth a closer look today, especially because its recent headwinds are transitory in nature. For example, the cybersecurity incident was limited to clients that had not effectively secured their data. Importantly, it was not caused by "any vulnerability, misconfiguration, or breach of Snowflake's product," said the company in a joint statement with third-party experts Mandiant and CrowdStrike.

Additionally, Slootman gave his successor, Sridhar Ramaswamy, glowing praise. "As the leading cloud data platform, Snowflake is at the epicenter of the AI revolution," he said "There is no better person than Sridhar to lead Snowflake into this next phase of growth and deliver on the opportunity ahead in AI and machine learning."

Finally, the company has been investing in AI product development. Cortex is a fully managed service that lets businesses process data with large language models and machine learning models trained for answer extraction, text summarization, forecasting, and anomaly detection. It also includes a conversational interface that lets users ask questions about their data in natural language and get meaningful answers.

While its heavy investments in AI product development have weighed on its operating margin (and will continue to do so), early evidence suggests those investments will pay off in the coming years. An executive survey recently conducted by Morgan Stanley had Snowflake ranked third (behind Microsoft and Amazon) in terms of which companies chief information officers see as most likely to gain market share in generative AI spending over the next three years.

Image source: Getty Images.

Snowflake stock still looks expensive

Snowflake reported mediocre results in its fiscal 2025 second quarter, which ended July 31. Total revenue increased 29% to $869 million. That beat estimates, but it was also a deceleration from the 33% growth it booked in fiscal Q1. Meanwhile, non-GAAP earnings declined by 18% year over year to $0.18 per diluted share as product development and marketing expenses caused its operating margin to contract by 3 percentage points.

Looking ahead, Snowflake is well positioned to benefit as demand for AI increases due to its cloud-agnostic architecture and the data-sharing capabilities its platform provides. While ongoing investments in product development will likely remain a drag on profitability in the coming quarters, revenue growth should reaccelerate and profitability should improve as its AI products gain traction.

Indeed, while Wall Street analysts expect adjusted earnings to decrease by 25% over the next 12 months, they also expect adjusted earnings to increase by 34% annually through its fiscal 2028, which will end in January 2028. That consensus outlook suggests that a strong turnaround is just a few quarters down the road. However, even in that context, the company's current valuation of 135 times adjusted earnings looks expensive.

Personally, I think patient investors with a high risk tolerance could open small positions in Snowflake today. But it would be more prudent to keep Snowflake on your watch list until the stock is trading at a more reasonable valuation.