Snowflake Inc. (SNOW, Financial) has been one of the biggest casualties of recent the economic downturn. Share prices have not managed to buck the trend as demand for its services declined in lockstep with the rest of the market.
Despite these developments, it is hard to ignore the long-term prospects for growth, which remain impressive. Although 2022 saw some setbacks for Snowflake, its ambition remains strong, and these turbulent months should be treated more as a small hiccup than anything else.
Nevertheless, with such a tumultuous atmosphere still lingering, it is hard to remain optimistic about Snowflake's near-term outlook. Keep watching the stock, though, as it has potential for massive gains once the market starts to improve.
Snowflake passes the earnings report hurdle with ease
On Nov. 30, the data cloud company reported a profitable fiscal third quarter of 2023. Revenue of $557 million beat analysts' predictions of $539.6 million and grew 67% year over year. The major driver of the revenue growth was product revenue at $522.8 million, which also rose by 67% year over year. The adjusted earnings per share of 12 cents increased a dramatic 200% year over year and topped estimates of 5 cents. Discussing the growth during the earnings call, the management team noted that data has become integral to all companies, which is reflected in the earnings report.
Notably, total customers grew 34% year over year to 7,292. Furthermore, management boasted that the company added 28 Global 2000 customers to its client roster. The net revenue retention rate for the quarter was 165%.
The company ended the quarter with a robust cash position of $4.9 billion, $65 million in free cash flow and an adjusted free cash flow margin of 12%. It is important to note that out of the free cash flow figure, stock-based compensation accounted for $235 million. There might be some vocal dissent from investors, but the reality is that now, more than ever, you need to pay top talent well because it is a valuable asset to any tech company.
Unlike other technology companies that have executed massive layoffs recently, Snowflake has been on a hiring spree. During the earnings call, management said the company had hired 1,500 net new employees on a year-to-date basis.
Muted outlook sours investor sentiment
Despite the solid results, investors were not happy with Snowflake's guidance. The company's outlook for fourth-quarter product revenue is $535 million to $540 million, translating to a growth figure of 50%. That is down considerably from the growth of 67% reported in the third quarter. As for the adjusted operating margin guidance for the fourth quarter, Snowflake said it would fall to 1%, a shocking decline from the 8% that was reported in the most recent quarter.
In fiscal 2024, the company anticipates product revenue growth of about 47% and a 23% rise in the non-GAAP adjusted free cash flow margin, which fall short of analysts' expectations.
Snowday 2022 will allay investor fears
At its annual Snowday on Nov. 7, Snowflake took to the stage to highlight the many innovations the company is bringing to its different services. The enhancements to its elastic performance engine have helped clients run their operations more quickly. For example, DoorDash (DASH, Financial) has credited Snowflake with helping it scale its data needs and manage complicated business requirements. The company also improved Snowgrid's cross-cloud collaboration, data governance and business continuity functions.
Other announcements at the event included the enrichment of its data cloud ecosystem. The application development program, which is powered by Snowflake, has been used by partners to develop applications. Companies like Capital One (COF, Financial) have used the native application framework to develop the latest class of applications. In addition, Snowflake has partnered with Amazon's (AMZN, Financial) Amazon Web Services, Dell Technologies (DELL, Financial), Salesforce (CRM, Financial) and others to develop joint solutions for innovations.
Snowflake's impressive growth in the number of partners and clients indicates it has plenty of potential for success. This is highlighted by its progress over the past decade, which has seen the company transition from a small, unknown name to one of the key players in the cloud computing services industry. With acclaimed enterprise data warehousing technology and a commitment to maximizing user access, Snowflake will likely continue to scale up, becoming a major player in cloud computing. Its ambition and innovative approach offer great promise for businesses looking to secure dependable data storage solutions.
Snowflake has seen a lot of positive press from analysts and has plenty of growth potential. However, investors may have stepped back a bit after taking in the slowing growth of its revenue and operating margin. Another factor weighing on investors is the concern over rising interest rates- an unwelcome development in any situation.
For now, it might make more sense to adjust expectations while watching the company move forward and wait to see whether there will be a strong pattern of growth in all aspects of Snowflake's performance in the future.