Snowflake (SNOW) Puts A Freeze On Growth Concerns As It Beats Sales Expectations And Lifts Guidance
2:39 pm Thursday, August 25th, 2022
Snowflake (SNOW) is experiencing a flurry of buying activity today after the data analytics company reported much stronger than expected growth in Q2, while also raising its FY23 product revenue guidance. Product revenue, which comprises the majority of SNOW’s total revenue, is the key metric that’s fallen under the microscope as SNOW’s growth rates decelerate. With many companies pulling back on spending lately due to macroeconomic headwinds, there was concern that product revenue growth was bound for an even steeper drop-off than SNOW has recently faced.
That concern quickly turned into astonishment after SNOW’s results were released, showing that product revenue growth remained virtually even with the last quarter at 83%. To rewind, Q1 growth came in at 84%, down from 102% in 4Q22, and from 110% in 3Q22. The company itself was anticipating a further slowdown, guiding for Q2 product revenue of $435-$440, equating to yr/yr growth of 71-73%. SNOW ultimately crushed its own forecast, and analysts’ estimates, by generating product revenue of $466.3 mln.
Drilling down further on SNOW’s earnings report, we find that the news is mostly bullish, although there are a couple blemishes.
Net revenue retention rate remained very robust at 171%, barely budging from last quarter’s mark of 174%. SNOW’s consumption-based model continued to work in its favor, even as macroeconomic conditions became more volatile.
Non-GAAP operating margin continues to move in the right direction, coming in at 4%, compared to flat last quarter and -8% in the year-ago period. Healthy top-line growth is creating operating leverage as expenses become a smaller percentage of total revenue. The company also credits increasing scale in its public cloud data centers as a positive contributor to margins.
On a GAAP basis, though, SNOW’s performance looks much less impressive. GAAP loss per share widened to $(0.70) from $(0.64) a year earlier, missing analysts’ expectations. The primary culprit is stock-based compensation, which totaled over $186 mln in Q2.
The main takeaway is that SNOW’s growth rate did not spiral sharply lower as some had feared, demonstrating that businesses are still spending generously on its platform, even as economic conditions waver. SNOW’s meteoric valuation, with a forward P/S approaching 16x, still poses a major risk to the stock. For now, though, the story revolves around SNOW’s resilient growth and its improving profitability on a Non-GAAP basis.
