Snowflake‘s (NYSE: SNOW) stock took an 18% dive on Feb. 29 after the cloud-based data warehouse services provider unveiled strong earnings complemented by soft guidance and the unexpected departure of CEO Frank Slootman.
For the final quarter of fiscal 2024, concluding on Jan. 31, Snowflake witnessed a 32% year-over-year revenue surge to $775 million, surpassing analysts’ expectations by $14 million. Among this, product revenue saw a 33% increase to $738 million. Additionally, its adjusted EPS leaped 150% to $0.35, surpassing the consensus forecast by $0.17.
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Snowflake’s numbers appeared robust on the surface. However, the company anticipates a modest 26% to 27% annual increase in product revenue for the first quarter of fiscal 2025, marking its slowest growth pace since its IPO. The departure of Slootman, who steered the company for the past five years, only heightened concerns.
What Snowflake is All About
Large corporations often house their data across various computing platforms, creating fragmented silos that hinder efficient data-based decision-making. Snowflake dismantles these silos, aggregates all data into its cloud-based warehouse, and enhances accessibility for third-party applications.
Snowflake operates its platform on Amazon (NASDAQ: AMZN) Web Services, Microsoft (NASDAQ: MSFT) Azure, and other cloud infrastructure services. While major cloud providers offer their data warehousing services, Snowflake stands out for companies seeking to avoid vendor lock-in. Its usage-based plans, charging solely for utilized storage and computing power, offer more flexibility than rigid subscriptions. Additionally, the recent launch of Snowflake Cortex streamlines the execution of generative AI applications.
The Decline of Snowflake’s Stock
Snowflake initially wowed investors with its growth rates. In fiscal 2021, product revenue skyrocketed by 120% and expanded by 106% in fiscal 2022. The net revenue retention rate, reflecting year-over-year customer growth over the prior 12 months, surged from 168% in fiscal 2021 to 178% in fiscal 2022.
However, fiscal 2023 saw Snowflake’s product revenue climb 70%, accompanied by a dip in the net revenue retention rate to 158%. In fiscal 2024, product revenue growth slowed to 38% at $2.67 billion as the retention rate fell further to 131%.
Metric | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
|---|---|---|---|---|---|
Product Revenue Growth (YOY) | 54% | 50% | 37% | 34% | 33% |
Net Revenue Retention Rate | 158% | 151% | 142% | 135% | 131% |
Data source: Snowflake. YOY = Year-over-year.
Assessing Snowflake’s Margins and Profitability
On a positive note, Snowflake noticeably expanded its adjusted product, operating, and free cash flow (FCF) margins over the past year by curbing its expenditure.
Metric | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
|---|---|---|---|---|---|
Adjusted Product Gross Margin | 75% | 77% | 78% | 78% | 78% |
Adjusted Operating Margin | 6% | 5% | 8% | 10% | 9% |
Adjusted FCF Margin | 37% | 46% | 13% | 15% | 42% |
Revisiting Snowflake: An Expensive Bet for Investors
Financial Performance: A Mixed Bag for Snowflake
The financial landscape for Snowflake, a data source, reveals a tumultuous journey as its net loss on a GAAP basis widened from $797 million in fiscal 2023 to $836 million in fiscal 2024. The alarming revelation was its stock-based compensation gulping down a staggering 42% of its revenue throughout the year.
Glimpse into the Future: A Costly Gamble
Analysts anticipate a meager 16% increase in adjusted EPS for fiscal 2025 on a non-GAAP basis, generously excluding the SBC expenses. Despite this silver lining, Snowflake’s stock remains exorbitantly priced at a jaw-dropping 165 times the projected estimate.
Investor’s Dilemma: To Buy or Not to Buy?
For investors eyeing Snowflake, exercising caution might be prudent as the stock continues to appear overvalued in light of its growth potential. While some might view its current valuation as a hurdle, waiting for a potential 36% drop to reach its IPO price of $120 could present an opportunity worth considering. Timing is everything, and diving into Snowflake’s stock at its current valuation might not be the wisest move.
Final Thoughts: Navigating the Financial Waters
It’s crucial for investors to remain cautious and closely monitor Snowflake’s trajectory. While it’s never too late to delve into the market, exercising patience until a more reasonable valuation emerges might be a prudent strategy. Market dynamics are ever-evolving, and making informed decisions based on comprehensive research and analysis can lead to more favorable outcomes in the long run.
