Snowflake Stock Soars On Strong Results

Snowflake NYSE: SNOW reported earnings after-hours on 24^th August.    Shares soared over 18% after-hours as better-than-expected results played strongly into investor sentiment.  Revenue surged by 83% to $497 million. The revenue retention rate came in at 171% meanwhile customers grew to 6800, indicating an 8% expansion from the first quarter. The stock is down 58% from its high.

Snowflake’s business model continued to show strong quarterly results as product revenue continued to see significant uptake from consumers.  The “warehouse as a service”, and a revenue, model based on usage is clearly working for management. Snowflake has projected that it will produce anywhere from $500-500 million in the next quarter, and the full-year revenue is expected to be around $1.91 billion to $1.92 billion. Management has also indicated that the company is expected to produce a gross margin of around 75% for the year.  Snowflake currently has more than 240 1m+ customers.

Snowflake is clearly benefitting from a strategy that was initially implemented in 2014. At that point, management decided to remove the scale, performance, and economic bottlenecks, that held back its data analytics services.  Snowflake’s customer base continues to be a wide range with customers ranging from financial services to healthcare, and retail.

The company also plans to introduce a number of key changes moving forward, which should help it to continue to compete in the future. On the earning’s call the CEO stated the following:

“ Now with massive disruption, the status quo must change. Our next frontier of innovation is aimed at reinventing cloud application development. Our ambition is far-reaching. Our aim is to transform how cloud applications are built, deployed, sold, and transacted.”

Snowflake introduced Powered by Snowflake recently, which should help engineers improve their velocity by leveraging design resources, and optimizing performance, especially for app developers. Powered by Snowflake now has over 590 customers and a 35% growth quarter-on-quarter.  The company also plans to acquire a number of new companies such as Applica to shore up its data analytics business. The acquisition should help the company improve its unstructured data.

The data warehousing industry is expected to grow to around $52 billion by 2028 according to projections, growing at a rate of around 11-12%. Snowflake is likely to benefit from additional customers not only in North America but also globally as well. Within the data warehousing market Snowflake currently has around a 20% market share. That number could increase as the company continues to aggressively introduce new products and features that help customers improve their end-to-end operations.

The company’s finances remained strong for the quarter as cash flow from operating activities turned positive during the quarter, with net cash from operating activities coming in at $64 million. Meanwhile, the non-GAAP operating margin came in at 2%. Considering Snowflake’s run-rate, the company could be headed towards profitability on a GAAP basis in 2024. The long-term margin for the company will probably be around 30% once the market settles down a bit.

Snowflake’s stock currently trades at 33x revenue, which is quite high despite the fact the revenue is growing quickly.  The company would need to maintain around 30-40% growth over the next 4-5 years, in order to justify its valuation. The stock has been trading sideways for a while and the 14-day RSI currently shows that the stock is neither overbought nor oversold.  Investors remain bullish on the stock, and the current put-to-call ratio is around 0.83. But the implied volatility remains high, which would make the stock less desirable for those looking for a steady stock.

Snowflake remains strongly placed to grow over the next few years, but questions remain about valuation. The data warehouse industry does not have many players, and the lack of competitors puts Snowflake in a strong position in terms of its ability to compete moving forward.