Snowflake's (SNOW +0.73%) stock plunged 17% on May 25 after the cloud-based data warehousing company posted its latest earnings report. For the first quarter of fiscal 2024, which ended on April 30, its revenue rose 48% year over year to $624 million and exceeded analysts' expectations by $15 million. It generated an adjusted net profit of $54 million, compared to a net loss of $1.5 million a year ago, while its adjusted earnings of $0.15 per share cleared the consensus forecast by a dime.
Those headline numbers seemed healthy, but they failed to revive the stock -- which still trades more than 60% below its all-time high. Let's reevaluate the bearish and bullish cases for Snowflake to see if it's worth buying.
Image source: Getty Images.
What the bears will tell you about Snowflake
Snowflake collects data from a wide range of computing platforms across an organization. It stores all of that information in a centralized cloud-based data warehouse so it can be easily accessed by third-party applications.
The bears will tell you that even though Snowflake initially grew like a weed, its growth in product revenue (which accounted for 95% of its first-quarter revenue) has slowed down since its IPO. Its net revenue retention rate, which gauges its year-over-year revenue growth per existing customer, has also been declining.
|
Metric |
FY 2021 |
FY 2022 |
FY 2023 |
Q1 2024 |
|---|---|---|---|---|
|
Product revenue growth (YOY) |
120% |
106% |
70% |
50% |
|
Net revenue retention rate |
168% |
178% |
158% |
151% |
Data source: Snowflake. YOY = year over year.
Snowflake expects its product revenue to only rise 33%-34% year over year in the second quarter, and to grow 34% for the full year. It attributes that slowdown to the macro headwinds that are curbing enterprise spending on software upgrades.
However, the bears will also point out that Snowflake faces fierce competition from similar cloud-based data warehousing platforms like Amazon Web Services' (AWS) Redshift, Microsoft's Azure Synapse, and Alphabet's Google BigQuery. Snowflake could struggle to grow over the long term as those tech giants bundle their own data warehousing services into their cloud infrastructure platforms.
Snowflake also remains deeply unprofitable on a generally accepted accounting principles (GAAP) basis. Its net loss widened year over year from $166 million to $226 million in the first quarter of fiscal 2024, mainly due to the stock-based compensation expenses that consumed 46% of its revenue, and it will likely stay unprofitable for the foreseeable future.
Lastly, Snowflake's enterprise value of $53.7 billion is still 21 times higher than its estimated product revenue for fiscal 2024. That high valuation, along with slowing growth and widening losses, could weigh down its stock in this choppy market.
NYSE: SNOW
Key Data Points
What the bulls will tell you about Snowflake
The bulls will tell you that even though Snowflake's growth is cooling off, it's still on track to achieve its goal of generating $10 billion in product revenue in fiscal 2029. To hit that target, it would only need to grow its product revenue at a compound annual growth rate of 32% from fiscal 2023 to fiscal 2029.
If its stock still trades at about 20 times sales in fiscal 2029, it could be worth about $200 billion that year -- which would mark a near-four-bagger gain from its current levels. Even if it only trades at 10 times sales, its stock could still double.
Snowflake's growth could also accelerate again once the macro environment improves. As for the competition, the bulls believe Snowflake's flexible usage-based model -- which only charges companies for the storage and computing power they actually need -- will continue to make it an attractive alternative to the walled gardens of AWS, Azure, and Google Cloud.
Snowflake's GAAP losses also aren't too alarming because it can gradually reduce its stock-based compensation as its free cash flow (FCF) improves. In fact, Snowflake's non-GAAP product gross, operating, and adjusted FCF margins -- which exclude its stock-based compensation -- all improved significantly over the past three years:
|
Metric |
FY 2021 |
FY 2022 |
FY 2023 |
Q1 2024 |
|---|---|---|---|---|
|
Non-GAAP product gross margin |
69% |
74% |
75% |
77% |
|
Non-GAAP operating margin |
(38%) |
(3%) |
5% |
5% |
|
Adjusted FCF margin |
(12%) |
12% |
25% |
46% |
Data source: Snowflake.
For the full year, Snowflake expects that expansion to continue with a non-GAAP product gross margin of 76%, a non-GAAP operating margin of 5%, and an adjusted FCF margin of 26%. Those rising margins can be entirely attributed to its improving scale instead of aggressive cost-cutting measures.
Instead of pinching pennies, Snowflake hired about 1,900 new employees in fiscal 2023 and plans to hire another 1,000 new workers in fiscal 2024. That confident expansion suggests Snowflake is in much better shape than the long list of tech companies that hastily executed mass layoffs over the past year.
Which argument makes more sense?
Snowflake is a well-run company with plenty of growth potential, but its stock is priced for perfection and it's been delivering imperfect results. So for now, I believe the bearish case against Snowflake will make more sense than the bullish one until its valuations cool off, the macroeconomic headwinds wane, and its top-line growth stabilizes again.
