To The Moon

$Snowflake(SNOW)$ Snowflake has just released its latest quarterly results, which exceeded expectations across the board, showing strong execution and growth. At the start of the year, things weren’t looking too promising, with weak guidance and a leadership change. Many assumed the new CEO would easily surpass the lowered expectations, and that’s exactly what happened.

Q3 Earning Overview

Q3 of fiscal 2024, Snowflake reported strong financial results, with total revenue at $734.2 million, marking a 32% year-over-year increase. Product revenue reached $698.5 million, a 34% rise from the same period last year. The company’s non-GAAP earnings per share were $0.25, significantly surpassing analyst expectations and reflecting strong demand and operational efficiency gains.

Snowflake's customer base grew as well, with 436 clients generating over $1 million in trailing 12-month product revenue (up 52% year-over-year) and 647 Forbes Global 2000 customers, representing a 10% increase. The company's net revenue retention rate, although slightly down to 135% from the previous quarter, still indicated robust customer expansion and continued high usage rates. Notably, Snowflake observed substantial growth in Snowpark usage, with a 47% sequential increase, showing increased adoption of advanced data solutions.

Fundamental Analysis

Despite the impressive growth, Snowflake is still not a cheap stock. The company is growing quickly—projecting 25-26% year-over-year growth for fiscal 2025 and over 50% growth in EPS for fiscal years 2026 and 2027. However, its current P/E ratio of 192.5 is high, but that number could come down fast if growth continues above 50% annually.

Margins and Profitability

The company’s non-GAAP gross margin improved to nearly 75%, driven by enhanced efficiency in product costs, economies of scale, and beneficial pricing in its cloud agreements​. Snowflake reported a non-GAAP operating income of $71.9 million, a 65.9% year-over-year improvement, reflecting careful management of operating expenses relative to revenue growth​. Additionally, the company reported adjusted free cash flow of $110.8 million, up 15%, indicating strong liquidity and operating cash generation.

Innovation and Product Pipeline

Snowflake is investing in new technologies, including Document AI and Snowflake Container Services, to drive future growth. These innovations, currently in private preview, aim to provide advanced data processing and AI capabilities, leveraging partnerships with providers like NVIDIA for machine learning models.

Customer Base Expansion and Retention

Snowflake's customer metrics reflect a solid expansion. The company now has 436 customers contributing over $1 million in trailing 12-month product revenue, representing a 52% year-over-year increase​. Among the Forbes Global 2000, Snowflake reported 647 customers, a 10% increase. These gains were slightly offset by a decrease in the net revenue retention rate to 135%, down from 142% in the previous quarter, indicating that while customer growth is high, the pace of expansion with existing customers has moderated.

Net losses year-over-year

Snowflake has been posting net losses year-over-year, despite revenue growth, due to ongoing investment in R&D, sales, and operational expansion, all aimed at scaling its data platform and supporting long-term growth. In Q3 2024, Snowflake’s net loss did narrow compared to the previous year, but it still remains unprofitable. A key factor in these losses is Snowflake’s focus on enhancing its product offerings and expanding its infrastructure, which has yet to translate into net income profitability as it contends with high operational costs.

Free Cash Flow

Cash Flow

The company had a solid quarter, missing its free cash flow estimate by $24 million but exceeding revenue and product revenue expectations. They also announced a strategic partnership with Entropic, which will deliver cutting-edge cloud models to Snowflake’s customers.

Key financials show a 29% year-over-year increase in product revenue, reaching over $900 million. Their net revenue retention rate is 127%, consistent with the previous quarter, which is encouraging given the scale of the business. Snowflake has expanded its customer base by 20% year-over-year, with the number of customers generating over $1 million in product revenue increasing 25% to 542.

Challenges

In Q3 2024, Snowflake faced several challenges, including slowing revenue growth, a slight decrease in its net revenue retention rate, and increased operational expenses, especially in research and development. The company also experienced a challenging macroeconomic environment impacting demand from enterprise customers, who have shown signs of slowing spending. Additionally, Snowflake’s revenue guidance for the coming quarters disappointed investors, contributing to volatility in its stock price and raising concerns about the company’s growth trajectory as it navigates a more competitive data cloud landscape.

In fiscal year 2024, Snowflake continued to experience net losses despite revenue growth, with a reported Q4 net loss of $169.9 million, a slight improvement over the prior year's $207.5 million. While product revenue grew 33% year-over-year to $738.1 million in Q4, Snowflake's full-year outlook disappointed investors. The company projected 22% product revenue growth for the coming fiscal year, well below previous rates, which caused its stock to drop sharply. Slowing revenue growth and rising operating costs contributed to ongoing challenges in achieving profitability.

Technical Analysis

Snowflake's stock faced technical pressure due to slowing revenue growth and cautious future guidance. After an earnings report that showed decelerating customer expansion and projected reduced growth, Snowflake’s stock saw a decline. The stock's movement indicated potential resistance levels as investors reacted to missed expectations, despite its substantial revenue growth year-over-year. Additionally, after the report, the price action reflected uncertainty about Snowflake’s ability to sustain its high growth rates amidst increasing competition and evolving enterprise demand.

Target Price

Outlook

For Q4 FY2024, Snowflake projects product revenue growth between 29% and 30%, suggesting continued, though slightly slower, growth as the company expands its large customer base. This guidance reflects a broader stabilization in demand across enterprise data services in a dynamic macroeconomic environment​.

Investment thesis

Snowflake’s investment thesis centers on its position as a leading data cloud platform with multi-cloud compatibility and extensive growth potential in the data warehousing and analytics market. The company’s innovative architecture enables efficient, scalable data processing, making it attractive to large enterprises increasingly relying on data-driven decision-making.

Despite its high operating costs and ongoing net losses, Snowflake continues to expand its customer base and introduce advanced features, such as Snowpark and AI capabilities. Long-term investors may view Snowflake as a promising growth stock, especially as it positions itself to capture growing demand for cloud data solutions in AI and machine learning​.

Market sentiment

Snowflake in Q3 2024 was mixed. On the positive side, investors recognize Snowflake’s strong growth potential in the data and AI cloud markets, driven by its versatile, multi-cloud data platform. However, concerns have risen due to slowing revenue growth projections and persistent net losses, which weigh on investor optimism. Following recent earnings and cautious guidance, Snowflake’s stock saw volatility, reflecting investor caution about near-term profitability and its ability to maintain high growth rates in a competitive landscape

Conclusion

Snowflake's Q3 2024 earnings report showed strong execution with product revenue growth of 29% YoY and a solid net revenue retention rate of 127%. However, despite these positives, free cash flow missed expectations, and the company continues to face decelerating growth as it scales. The guidance for fiscal 2025 was raised to 29%, reflecting improved outlook, but the stock's premium valuation remains a concern, with a current P/E ratio of 192.5x.