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Though data cloud specialist Snowflake‘s (NYSE: SNOW) stock, with a year-to-date return of 4%, has drastically underperformed the Nasdaq Composite in 2023, there’s still substantial downside risk for the stock ahead. This main risk to the stock price is quite simple: The company’s revenue growth could disappoint — particularly next year. Snowflake’s year-over-year growth rates are trending downward at an alarming rate. If this persists, analysts’ estimates for next year’s top-line growth could be a bit too optimistic.

Despite this risk, I do think analysts are right to expect top-line growth to stop decelerating soon.

What could go wrong

How could Snowflake’s top-line growth disappoint?

First, some background. The data cloud specialist’s product revenue (about 95% of total revenue) has rapidly decelerated. Revenue in its most recent quarter (Q2 of fiscal 2024) grew 37% year over year. This was down from 48% growth in the prior quarter and 54% growth in the three-month period before that.

Even more, management guided for fiscal third-quarter revenue growth to decelerate again, growing at a rate between 28% and 29% year over year. This rate is actually below the nearly 31% year-over-year growth analysts are anticipating, on average, for Snowflake in fiscal 2025 (a fiscal year overlapping with much of calendar 2024).

Snowflake’s decelerating top-line growth needs to stabilize soon. Otherwise, Wall Street could lose faith in its rosy long-term outlook for the company.

What could go right

Of course, it’s always possible that Snowflake’s decelerating top-line growth is about ready to hit a trough. Even better, perhaps the company’s revenue growth reaccelerates in fiscal 2025. Believe it or not, a good case can be made for revenue growth rates to stabilize soon.

First, consider that Snowflake’s net revenue retention rate at the end of its most recent quarter was 142%. The metric, which measures growth in spend (and platform usage in Snowflake’s case since the company has a usage-based business model) from existing customers, shows there’s an enormous appetite for the company’s data cloud platform.

Additionally, Snowflake is doing very well with large customers. It ended fiscal Q2 with 402 customers generating trailing-12-month product revenue greater than $1 million, up 62% year over year. This outsize growth in large customers is rapidly expanding the company’s immediate addressable market of customers who will likely collectively increase their consumption substantially over time.

Finally, while Snowflake hadn’t seen its revenue growth rate trends stabilize by the time it reported its fiscal second-quarter earnings earlier this month, management did say it “saw promising signs of stabilization with new bookings outperforming [its] expectations.” Though the company only records revenue in line with consumption (or usage of its platform), bookings trends are an excellent leading indicator of how Snowflake’s customers are prioritizing future platform consumption, which would translate directly to revenue.

Combining the company’s high net revenue retention rate, its momentum with large customers, signs of stabilizing booking trends, and much more manageable year-ago comparisons, it’s easy to imagine revenue growing at a rate of about 30% or greater next year.

If the company’s growth rate doesn’t stabilize around 30%, investors could lose faith in the stock’s wild premium, which currently has the company valued at a market capitalization of more than $48.5 billion.

For what it’s worth, management is certainly optimistic about Snowflake’s long-term potential. The data cloud platform provider has said it expects to be raking in $10 billion in annual product revenue by fiscal 2029, or just over five years from now. That’s a great jump from Snowflake’s trailing-12-month product revenue of $2.3 billion.

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Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.

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