The market thrashed Snowflake . NYSE:SNOW stock after its FQ earnings report. It further exacerbated its recent steep compression from its November highs, down almost % to its recent March lows.

Notably, it also took out the lows we last saw in May , creating a delightful bear trap to ensnare bearish investorstraders. Therefore, we believe that investors who have been patient can consider capitalizing on its recent weakness to add.

SNOW stock used to be the most expensive stock in our high-growth SaaS comps set. Nonetheless, new readers to Snowflake need to note that Snowflake doesn t operate a typical SaaS business model. It primarily relies on consumption-driven revenue, as opposed to a subscriptions model. Therefore, it s critical for the company to focus on driving more workloads and more compute opportunities.

Notably, SNOW stock is trading near its lowest valuation reached at the recent March lows since its listing. It s currently trading at an NTM revenue multiple of .x, recovering from its recent March lows of .x.

Still, investors would point out that SNOW stock is still trading at a significant premium, given the steep compression in software stocks over the last six months.

Investors have been accustomed to Snowflake s breathtaking growth rates that have exceeded % over the last eight quarters. Therefore a weaker than expected guidance for FQ took investors by surprise.

Snowflake guided for just $M mid-point for FQ, up % YoY. However, it expects FY revenue to increase by %. The company pointed to near-term headwinds attributed to a software tweak that improves its customers priceperformance ratio. Therefore, Snowflake s customers can consume more efficiently, potentially lowering their costs. However, Snowflake also expects revenue headwinds as its customers adjust their compute requirements.

Nevertheless, Snowflake sees such headwinds as transitory. As a result, it s taking a long-term approach to encourage adoption. Snowflake believes that its customers are still very early in their adoption curve in migrating their workloads to its data cloud. Consequently, the company is focusing on improving the economics of its platform to drive greater workload migration, which should lead to greater compute needs over time.

Notably, Snowflake emphasized investors should continue to expect improvement to the priceperformance curve over time. Unfortunately, the overwhelming focus has been on its near-term revenue hit, without paying heed to the adoption motion. Furthermore, it takes time for its customers to migrate more workloads to Snowflake s platform, leading to a gap in revenue generation. CFO Michael Scarpelli articulated edited:

A number of our customers have said, we ll move these workloads over to you. But until you get your performance at the speed at which you can do things up to this level because the latency is a bigger issue, we can t move those to Snowflake. So we know with all the performance improvements we re doing within our existing customers, our salespeople just need to go back in and demo and show what we ve done and run POCs again that there will be workloads moving to us. But it takes time because once again, customers don t just, move more workloads on that. They still want to test it and do a number of other things. And that s why we think there s about a -month lag for every performance improvement we do. We may have a revenue hit, but then within six months, those customers are consuming more. Morgan Stanley TMT Conference

Therefore, Snowflake wants investors to have a long-term perspective. Notably, Snowflake s consumption-based model could lead to challenges in revenue forecasting due to such adjustments and time-lags. However, we see the long-term adoption potential of Snowflake s data cloud, predicated on its consumption model. Notably, industry CIOs have also been pleased with how Snowflake prices and improves its product. WSJ reported edited:

Forrester Research found that most CIOs like Snowflake s usage-based model. Moreover, CapitalG also highlighted that improvements to Snowflake s platform will continue to attract CIOs and other corporate tech leaders. These leaders are overseeing increasingly tight IT budgets and looking to lower costs without sacrificing capabilities. Therefore, in the long term, lower costs and greater efficiencies will help drive continued customer adoption. – WSJ

Moreover, the Street also considers that Snowflake may have sandbagged its FY guidance. Snowflake CEO Frank Slootman also emphasized that he s more conservative with the company s revenue guidance, given the adjustments and tougher comps. Nevertheless, the average estimates suggest FY revenue of $.B, markedly above the company s guidance of $.B mid-point. Moreover, investors should note that the company has actually outperformed the estimates it furnished at its listing and its initial FY guidance. Therefore, Snowflake has certainly executed tremendously well. Nevertheless, Slootman highlighted edited:

The company is taking a conservative approach to guidance. Investors should note that the original outlook for FY was % growth, and the actual outperformance was percentage points higher. We have also signed up a slew of new customers that are just coming on board and so far haven t generated any revenue at all. Therefore, the company is not going to get aggressive projecting revenue from customers that so far have no history on the platform. – Barron s

We highlighted earlier that SNOW s stock took out its May lows at its recent March lows. It has also created a bear trap that has since staged a reversal. Coupled with a more attractive valuation than its May lows, we think investors can capitalize on its weakness to add.

Nonetheless, we must remind investors that it s still trading at a premium valuation. Therefore, you must maintain a firm conviction over its business model and execution to invest in SNOW stock. Furthermore, we also expect it to experience high volatility moving forward, given its premium price tag.