Snowflake Stock Meltdown: Is the Cloud Giant’s Growth Story Over?

Snowflake (NASDAQ:SNOW) has been in the cloud industry “penalty box” since former CEO Frank Slootman retired suddenly at the end of February.

Snowflake is a cloud data warehouse that competes with Cloud Giants like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), as well as privately held competitors including Databricks, Motherduck and Clickhouse.

Its fall has been precipitous. Snowflake stock sold at $230 per share before Slootman’s announcement. It will open July 15 at about $136. It is still no bargain. The market cap is roughly 15 times expected sales of $3 billion.

But is this something where you “buy on the dip?” Or is this a broken growth story you need to walk away from?

Massive Hack Attacks

Snowflake is in the news right now for all the wrong reasons.

It is responsible for a huge hack against AT&T (NYSE:T) and dozens of other companies that were storing data with it.

Snowflake disclosed the hack on May 30. But it wasn’t its technical systems that broke. According to the Alphabet (NASDAQ:GOOG, GOOGL) security subsidiary Mandiant, which investigated the problem, customers’ contractors had their credentials stolen.

But blaming the victim doesn’t work for me. First, as Mandiant noted, “Some of the malware infections in Snowflake’s systems date to 2020 and the credentials were, in some cases, still valid years after being stolen.” Also, Snowflake only began demanding two-factor authentication from its users this month.

If I were a potential Snowflake customer, or even a current one, I’d have to ask some hard questions, based on these facts. I’m not sure I’d like the answers.

Slootman Out Before the Hammer Fell

When Slootman stepped down in February, it was called an effort to “step up to AI.” Slootman was called more of a business leader than a tech leader.

But that’s not true. Slootman is a tech leader. He began his career running the data testing operation at Borland, a 1990s era tools company. After the dot-com bubble popped he joined a storage startup called Data Domain (now part of Dell Technologies (NYSE:DELL)). Then he became CEO of ServiceNow (NYSE:NOW). He is described as an “insanely confrontational” leader.

Snowflake was the third tech company he took public after Data Domain and ServiceNow. He was trusted by investors and thus able to run Snowflake from his home in Bozeman, Mont. A January profile on the Sequoia Capital site calls him a “next stage growth doctor.”

As an investor, I like Frank Slootman. He supported his own myth by writing a book in 2022 called Amp it Up with blurbs by other tech leaders testifying to his greatness.

That doesn’t sound like “a business leader” who needs to give way to a “tech leader.” It sounds like a billionaire getting out of the way before the bad news hits. A hack that started in 2020, with credentials held by hackers for years, is not what customers and would-be customers want to read.

This is especially true as Goldman Sachs joins the parade of critics wondering whether generative AI is all its makers claim. Too much spending for too little benefit sounds like hard times and consolidation is on the way.

The Bottom Line on Snowflake Stock

Snowflake made its reputation by offering tight integration with other tool vendors. This created a lot of partners, each with their own policies and many relied on third-party consultants to do their work. Yet Snowflake only began mandating two-factor authentication this month?

That’s not the position you want to be in when the market is slowing, and your competitors include the Cloud Giants. My guess is Slootman still has a job to do and that is getting his investors out with their shirts on.

The near term outlook for this stock is grim. For investors’ sake I hope it comes back.

As of this writing, Dana Blankenhorn had a LONG position in MSFT, AMZN, and NOW. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.