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The Ratings Game: Snowflake stock drops after downgrade: ‘To be blunt, this is a tough call’

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Shares of Snowflake Inc. were falling more than 3% in morning trading Tuesday after an analyst said he was making the “tough call” to downgrade the data-software stock.

BTIG’s Gray Powell cut his rating on Snowflake shares
SNOW,
-1.54%

to neutral from buy Tuesday, writing of potential competitive concerns for the company as well as slightly less exuberant views from customers, based on his recent conversations with a few of them.

“[S]pending intentions with SNOW remained solid, but feedback was not nearly as good as 6 – 12 months ago as customers are becoming increasingly concerned about a weakening economic environment,” Powell wrote.

While two of the customers he spoke with maintained that they wouldn’t change their Snowflake spending in the event of “an outright recession,” two others said they could reduce spending by 25% to 40% in that scenario.

Additionally, Powell flagged comments from “two large customers” who said they were considering moving some spending over to privately held rival Databricks “to help contain rising SNOW costs.”

“This is likely an early-stage trend,” he continued. “But again, the difference relative to 6 – 12 months ago was notable and makes use more cautious on the name.”

Powell also pointed to slowdowns in cloud revenue growth at Amazon.com Inc.
AMZN,
+0.03%
,
Microsoft Corp.
MSFT,
-1.68%
,
and Alphabet Inc.
GOOG,
-0.48%

GOOGL,
-0.57%
,
a trend that he thought “likely has negative implications” for Snowflake.

‘People will freak out’: The cloud boom is coming back to Earth, and that could be scary for tech stocks

“To be blunt, this is a tough call, because the long-term growth opportunity ahead of SNOW remains very compelling and management is considered among the best in software,” Powell said. He noted that Snowflake “has never missed a quarter and the management team consistently executes,” though he added that “forecasts for the rest of [the fiscal year] look a little aggressive.”

Powell brought down his own fiscal 2023 product-revenue estimate to $1.88 billion from $1.90 billion and lowered his fiscal 2024 outlook on the metric to $2.76 billion from $2.84.

Shares of Snowflake have lost 57% so far this year as the S&P 500
SPX,
-0.63%

has declined 14%.

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