Snowflake can prove to be a long-term winner, despite several near-term revenue headwinds.
Cloud-native data storage and analysis specialist Snowflake‘s (SNOW -1.18%) shares tanked 33% since the company released its fourth-quarter fiscal 2024 earnings report (for the period ending Jan. 31, 2024) on Feb. 28. While the company’s fourth-quarter revenue and earnings surpassed consensus estimates, investors are disappointed with underwhelming guidance for fiscal 2025.
Snowflake expects technology advancements and product efficiency gains (which are being passed on to customers) to make the platform even more cost-effective for customers. This implies less spending by customers, which in turn, will affect the company’s fiscal 2025 revenue. Plus, the rollout of tiered storage pricing (the company will give discounts to its customers for storing higher volumes of data) is also expected to negatively affect future revenue. Snowflake is further gearing up to make its support for the open-source Iceberg Table format generally available around June 2024. Subsequently, some large customers are expected to shift out a portion of their data from Snowflake’s platform to Iceberg Tables. Besides losing some storage revenue, the company also expects to lose some compute revenue since a few workloads can run directly on Iceberg Tables.
While the near-term impact of these challenges cannot be ignored, these initiatives are expected to bring more customers and workloads to Snowflake’s platform in the long run. Even if these strategies do not succeed, there is still much to like in this stock.
Consumption patterns seem to be stabilizing
The consumption of Snowflake’s cloud data services was adversely affected by the IT budget cuts of 2023. However, the trend of customers optimizing their IT spending seems to be normalizing. Subsequently, Snowflake saw improvement in consumption patterns as compared to those at the beginning of 2023, although they are still not in line with pre-2023 levels. The strength in consumption was mainly driven by customers from financial services, retail, and technology verticals.
Snowflake changed the compensation structure of the sales team to further drive consumption. While 35% of the sales team is compensated to acquire new clients, 55% is compensated to drive consumption within existing clients and 10% are incentivized for both new customers and consumption.
Snowflake is acquiring new customers at a healthy clip. The company reported a 21.8% year-over-year jump in total customer count to 9,437 at the end of fourth quarter. The company catered to 461 customers who contributed over $1 million in product revenue annually at the end of the fourth quarter, up 39% on a year-over-year basis. Snowflake also saw eight out of its top 10 accounts increase consumption sequentially in the fourth quarter.
Remaining performance obligations (RPOs) were up 41% year over year to $5.2 billion. Since RPO is indicative of the strength in bookings, it also highlights the improving macro environment for the company.
Against this backdrop, the chances of Snowflake surpassing its fiscal 2025 guidance remain quite high.
Multiple competitive advantages
Snowflake’s cloud-native data platform helps organizations consolidate structured and unstructured data across multiple sources and then analyze it to derive intelligent insights. Although it’s not exactly an artificial intelligence (AI) company, Snowflake’s scalable, optimized, and secure data platform is playing a pivotal role in handling the data part of the clients’ AI strategies.
Snowflake also allows customers to share data through the Snowflake Data Marketplace. Access to a large amount of diversified data across use cases plays a vital role in refining the clients’ AI models. Hence, data sharing capability is proving to be a major competitive advantage for Snowflake and helped attract new customers.
Snowflake’s developer framework, Snowpark, enables developers to process and analyze data within the Snowflake data cloud. Snowflake expects Snowpark to account for 3% of fiscal 2025 revenue (nearly $95 million to $100 million), implying year-over-year growth of roughly 170%. Snowpark can continue to be a major growth catalyst, since customers are increasingly preferring it for its simplicity, better economics and higher performance without having to move data out of the Snowflake data cloud.
Snowflake is also gearing to make Snowflake Cortex, a fully managed service that enables organizations to analyze data and build AI applications using advanced AI models directly within the Snowflake data cloud, available for public preview. Cortex is expected to enable non-technical users to use AI capabilities on the data in the Snowflake cloud.
These competitive advantages enabled the company to build a sticky customer base, making its financial performance quite resilient even in difficult times.
Reasonable valuation
Despite the many pros, Snowflake is currently trading at 18.6 times trailing-12-month sales, lower than its 12-month average price-to-sales (P/S) multiple of 22.5x and three-year average P/S multiple of 41.7x. While the low valuation is a result of near-term headwinds, the long-term growth story still seems quite intact.
Considering the improving consumption environment, several yet-to-be monetized features, and focus on expanding its customer base, Snowflake’s recent share price correction may present an attractive entry point for the patient long-term investor. It may also make sense for investors to opt for a dollar-cost-averaging strategy to gradually build a position in Snowflake stock, while controlling risks.
