Wall Street analysts believe that Snowflake Inc. (SNOW) is a good investment: is it?

When deciding whether to buy, sell or hold a stock, investors often rely on analyst recommendations. Media announcements of rating changes by these analysts hired by brokerage firms (or sellers) often affect the stock price, but do they really matter?

Before we discuss the reliability of broker referrals and how to use them to your advantage, let’s see what these Wall Street heavy hitters think Snowflake Inc. (SNOW).

Snowflake Inc. currently has an average brokerage recommendation (ABR) of 1.85 on a scale of 1 to 5 (strong buy to strong sell), calculated based on actual recommendations (buy, hold, sell, etc.) made by 33 brokerages companies. An ABR of 1.85 is roughly between a strong buy and a buy.

Of the 33 recommendations that stem from the current ABR, 20 are Strong Buy and two are Buy. Strong Buy and Buy respectively account for 60.6% and 6.1% of all recommendations.

Brokerage recommendation trends for SNOW

Broker Rating Breakdown Chart for SNOW

Check Snowflake Inc stock price target and forecast. here>>>

While ABR urges to buy Snowflake Inc., it may not be prudent to make an investment decision based on this information alone. Several studies have shown limited or no success of brokerage recommendations in guiding investors to select stocks with the best potential for price appreciation.

Are you wondering why? Brokerage firms’ personal interest in a stock they cover often results in a strong positive bias in their analysts’ valuations. Our research shows that for every Strong Sell recommendation, brokerage firms assign five Strong Buy recommendations.

In other words, their interests are not always aligned with retail investors, rarely indicating where a stock’s price might actually be headed. Therefore, the best use of this information may be to validate your own research or an indicator that has proven to be very successful in predicting stock price movements.

With an impressive externally audited track record, our proprietary stock rating tool, Zacks Rank, which ranks stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of near-term price performance of a given action. So validating Zacks Rank with ABR can go a long way in making a profitable investment decision.

ABR should not be confused with Zacks Rank

Although both Zacks Rank and ABR are displayed on a range of 1-5, they are completely different measures.

ABR is calculated solely based on broker recommendations and is usually shown in decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model that allows investors to harness the strength of earnings estimate revisions. It is displayed as whole numbers — 1 to 5.

It was and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Due to the vested interests of their employers, these analysts issue more favorable valuations than their research would warrant, misleading investors far more often than helping them.

In contrast, the Zacks Rank is determined by earnings forecast revisions. And short-term stock price movements are strongly related to trends in earnings estimate revisions, according to empirical research.

In addition, the various Zacks Rank classes are applied proportionately to all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, this instrument always maintains a balance between its five ranks.

There is also a key difference between ABR and Zacks Rank when it comes to freshness. When you look at the ABR, it may not be up to date. Nevertheless, since brokerage analysts constantly revise their earnings forecasts to reflect changing business trends, and their actions are reflected in the Zacks Rank quickly enough, it is always timely to predict future stock prices.

Is SNOW a good investment?

Looking at Snowflake Inc.’s earnings forecast revisions, the Zacks Consensus Estimate for the current year has increased 13.9% over the past month to $0.58.

Analysts’ growing optimism about the company’s earnings outlook, as indicated by strong consensus among them to revise higher EPS estimates, could be a legitimate reason for the stock to surge in the near term.

The size of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #2 (Buy) for Snowflake Inc. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, the buy equivalent ABR for Snowflake Inc. can serve as a useful guide for investors.

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