Snowflake (NYSE: SNOW), a software company, is renowned for its data cloud platform which houses a global network designed to maximise its cloud potential.
This platform allows thousands of organisations to manage their data concurrently, providing both scale and performance.
Snowflake’s unique platform allows thousands of organisations to manage their data with extensive storage and computing power.
Key features of the platform include data storage, processing, and analytic solutions that run faster than traditional systems.
Furthermore, the company’s multi-cloud functionality across various cloud platforms such as Amazon Web Service and Microsoft Azure provides flexibility to its users.
Snowflake made its debut on the New York Exchange on 16 September 2020, with an initial price of US$120.
On its first day of trading, share prices soared, opening at US$245, marking the largest initial public offering of a software company in 2020.
However, this year has been challenging for the company. Its share price recently hit a new 52-week low of US$124.69, close to its IPO price of US$120.
With the share price languishing near its all-time low, we dig deeper to determine if the company qualifies as a great bargain.
Unpacking Snowflake’s earnings
Snowflake has been touted as a growth stock with impressive revenue and margin growth.
For the first quarter of fiscal 2025 (1Q FY2025), Snowflake reported revenue of US$828.7 million. Product revenue, which made up 95.3% of the total, stood at US$789.6 million, chalking up a 33.8% year on year increase.
However, net loss came in at US$317 million, significantly higher compared to a loss of US$225.6 million in the previous year.
The significant loss this quarter can be attributed to high research and development (R&D) expenditures. R&D expenditures shot up by 48% year on year from US$277.4 million to US$410.8 million.
Despite these losses, Snowflake continues to deliver impressive margins. Its product gross margin stood at 72%, similar to last year’s gross margin.
Another strong point to note is that the company generated a positive free cash flow of US$331.5 million.
Snowflake has a healthy balance sheet with US$1.3 billion of cash and US$2.2 billion of investments and no debt.
The cloud giant continues to attract major clients, now serving 709 customers from the Forbes Global 2,000, a 7.9% year on year increase.
Meanwhile, customers are also spending more.
Customers contributing over US$1 million in product revenue grew by 30% year on year to 485.
Snowflake’s Remaining Performance Obligations (RPO) surged by 46.3% year on year, from US$3.4 billion to US$5.0 billion, reinforcing its status as a premier cloud provider.
RPO represents the total value of services contracted that have yet to be delivered to Snowflake’s customers, given its subscription-based business model for certain products.
This growth in RPO signals strong revenue growth potential and affirms customers’ commitment to using Snowflake’s platform.
Possible reasons for Snowflake’s share price decline
Despite posting solid revenue growth and consistent margins, shares of Snowflake still slid by 5.7% on the day of its earnings release.
Furthermore, shares witnessed a further sell-down, dragged down by weak guidance from other Software as a Service (SaaS) companies such as MongoDB (NASDAQ: MDB) and Salesforce (NYSE: CRM).
MongoDB has revised its full-year guidance for fiscal year 2025 (FY2025) downwards, attributing the adjustment to slower demand for its cloud service, Atlas.
Meanwhile, Salesforce reported a modest revenue growth of 11% year on year for 1Q FY2025. However, its revenue of US$9.13 billion did not meet analysts’ expectations of US$9.35 billion.
Additionally, Salesforce reduced its guidance for subscription and support revenue growth and operating margins for FY2025.
Other details may also explain the market’s reaction.
Firstly, Snowflake revised its financial outlook, lowering both its product and operating margins for FY2025.
This downward adjustment is due to increased GPU costs related to the company’s artificial intelligence (AI) initiatives.
The company anticipates a product gross margin of 75%, marking a three percentage point reduction from 78%.
Operating margin is also expected to 3%, a five percentage point drop from 8%.
Secondly, Snowflake’s net revenue retention rate (NRR) has been showing a consistent quarterly decline.
NRR is a metric that measures a company’s ability to retain revenue from existing customers over a specific period.
Source: Snowflake’s Investors Presentation
Snowflake’s data warehouse also competes with platforms operated by larger technology giants such as Amazon’s (NASDAQ: AMZN) Redshift and Alphabet’s (NASDAQ: GOOGL) BigQuery .
These companies could challenge Snowflake’s unique usage-based pricing model as compared to traditional subscription-based pricing.
Snowflake’s usage-based pricing model is a key selling point for increasing affordability.
However, given the profitability of Amazon and Alphabet in their other business segments, they could easily afford to run their data warehouse business with lower margins to challenge Snowflake’s market share and pricing strategy without facing financial consequences.
Snowflake’s once compelling year-on-year product revenue growth has begun to moderate, as displayed in the diagram below.
Source: Author’s Calculation
This slowdown in top-line growth coupled with weaker margins may be causing investors to lose interest in this company.
Lastly, the company still has not turned profitable, leading investors to question the sustainability of the company’s business model.
Snowflake’s Growth prospects
However, the prospects for Snowflake remain bright.
Crucially, Snowflake’s core business would be profitable were it not for its substantial R&D and sales and marketing expenses.
For 1Q FY2025, these expenses accounted for 97.9% of total revenue.
Although this expenditure is high, we can expect it to decline as the business scales.
Notably, two years ago, in the first quarter of fiscal year 2023 (1Q FY2023), Snowflake’s investment in R&D and sales and marketing exceeded its total revenue generated.
Additionally, Snowflake has generated positive free cash flow since fiscal year 2022 (FY2022), implying that financials are improving.
The company is actively expanding its capabilities in new ways.
Last month, Snowflake announced Cortex, an intelligent, fully-managed service that offers machine learning and AI solutions to Snowflake users.
Cortex leverages generative AI to enable users to unlock dynamic insights with their enterprise data.
Apart from Cortex, Snowflake plans to release 10 other features such as Iceberg and Snowpark later this fiscal year. The company is accelerating its new feature pipeline as FY2024 saw just four new features released.
Snowflake has developed its own Large Language Model (LLM) called Arctic, which has outperformed other LLM models in various benchmarks, such as Meta Platforms’s (NASDAQ: META) Llama.
Furthermore, the company is also enhancing its capabilities through a strategic partnership with Nvidia (NASDAQ: NVDA) which aims to provide its customers with a platform designed to boost AI productivity, thereby enhancing business performance.
The company has increased its full-year product revenue expectation, now forecasting a 24% year on year growth, with a projected revenue of US$3.3 billion.
This is a 1.5% increase from previous expectations of US$3.25 billion.
These 10 new features will provide new revenue streams and more users, re-accelerating Snowflake’s year on year revenue growth.
Snowflake’s focus on ramping up its AI offerings displays its commitment to maintaining its leadership in the data warehousing sector.
Given the vast amount of data produced by modern society, and with data volumes expected to grow more than ten times from 2020 to 2030, an efficient system for managing and storing data is necessary.
Snowflake foresees its total addressable market (TAM) will double from US$152 billion in 2023 to US$342 billion in 2028, creating ample opportunities for the company to grow alongside the data and cloud industry.
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Disclosure: Aw Kai Rui does not own any of the stocks mentioned in this article.
