After a disappointing Q2 earnings report, Snowflake (SNOW, Financial) made a significant comeback with an impressive Q3 performance. The company not only exceeded expectations but also highlighted its AI-driven growth strategies. In addition to its earnings report, Snowflake announced the acquisition of Datavolo and a new partnership with Amazon-backed Anthropic (AMZN, Financial), underscoring its commitment to AI advancements.
- Following the Q2 report, concerns about slowing consumption growth due to macroeconomic challenges and competition from Microsoft (MSFT, Financial) and Databricks had intensified, leading to a 35% year-to-date decline in SNOW's stock. However, the Q3 results and guidance alleviated these fears, boosting confidence in Snowflake's AI innovations.
- Product revenue, a key growth indicator, surged by 29% year-over-year to $900.3 million, surpassing the $850-$855 million guidance. This growth was driven by new enterprise customer acquisitions and increased usage from existing clients. Customers generating over $1 million in product revenue rose by 25% year-over-year to 542, while the net revenue retention rate remained strong at 127%.
- Despite significant investments in AI and new products, with R&D expenses rising 33% to $442.4 million in Q3, Snowflake's profitability improved. The non-GAAP operating margin reached 6%, exceeding the 3% guidance, thanks to strong top-line growth.
- New products are contributing more significantly to growth. For example, Snowpark, which enables the use of programming languages like Python, Java, and Scala within Snowflake's cloud platform, is projected to account for about 3% of total revenue.
- Snowflake is well-positioned to leverage AI's emergence. Over 3,200 accounts are utilizing its machine learning and AI features, with more than 1,000 AI use cases deployed in new products like Snowflake Intelligence and Unistore.
- The partnership with Anthropic will integrate large language models into Snowflake's Cortex AI service on Amazon Web Services, allowing customers to efficiently develop AI products and apps using Anthropic's Claude 3.5 model.
The key takeaway is that Snowflake has successfully alleviated concerns over declining product revenue growth and reestablished itself as a significant player in the AI sector. Although the stock remains expensive with a forward P/S ratio above 10x, its growth catalysts justify the valuation.
