Snowflake Inc. (SNOW) earnings preview: Navigating Slowing Growth and Increased AI Investments
AInvestWednesday, Aug 21, 2024 3:13 pm ET
2min read
SNOW --

As Snowflake Inc. (NYSE: SNOW) prepares to release its second-quarter earnings report after today’s market close, the company finds itself at a critical juncture.

While the stock has seen a recent rally, climbing approximately 15% over the past two weeks, it remains down more than 40% since the company reported its fourth-quarter results in late February.

Investors are keenly awaiting the upcoming report to assess whether Snowflake can overcome its recent challenges, including slowing growth and heightened spending on artificial intelligence (AI) initiatives.

Expectations and Market Sentiment

For Q2, analysts are expecting Snowflake to report earnings per share (EPS) of $0.16 on revenue of $851.7 million.

While these figures reflect continued growth, the company’s hefty valuation—currently trading at a one-year forward price-to-sales (P/S) ratio of around 10.5x—means that expectations remain high, and any missteps could weigh heavily on the stock.

Snowflake’s business model, which is based on customer consumption rather than a traditional subscription model, adds another layer of complexity to the company’s financial performance.

This means that revenue can be highly sensitive to fluctuations in customer usage, making it more difficult to predict with certainty.

AI Investments and Margin Impact

A significant factor that has weighed on Snowflake’s stock in recent months is the company’s decision to ramp up investments in AI.

Following the appointment of Sridhar Ramaswamy as CEO—who brings extensive experience from his time as an executive at Google—Snowflake has announced plans to significantly increase spending on GPU chips to support its AI initiatives. These include the development of its Cortex large language model, which is similar to Meta Platforms’ (META) Llama 3 model.

While these investments are expected to position Snowflake as a leader in the AI-driven data platform space, they come at a cost.

The company has already lowered its fiscal year 2025 (FY25) non-GAAP operating margin guidance from 6% to 3% and its adjusted free cash flow margin guidance from 29% to 26% due to the increased spending.

This shift has raised concerns among investors about the near-term profitability of the company, even as it pursues long-term growth opportunities.

Slowing Growth and Consumption Trends

Another area of concern is the apparent moderation in consumption trends, which Snowflake reported during its Q1 earnings call.

The company’s product revenue, which is directly tied to customer usage, grew by a robust 34% in Q1 to $789.6 million—easily beating guidance. However, for Q2, Snowflake has guided for product revenue of $805-$810 million, which represents a slowdown in growth to 26-27%.

This deceleration is significant, as it suggests that while Snowflake continues to grow, the pace of that growth is beginning to taper off.

Investors will be closely watching the Q2 report for any updates to the company’s outlook for product revenue and operating margins for the rest of the fiscal year.

Key Metrics to Watch

Beyond the headline numbers, several other key metrics will be closely scrutinized in Snowflake’s Q2 report. These include the net revenue retention rate and the number of large customer accounts. In Q1, Snowflake’s net revenue retention rate remained strong at 128%, indicating that existing customers were continuing to spend more on the platform.

Additionally, the company added fourteen new customers with annual spending of over $1 million, bringing the total number of such customers to 485.

These figures will be critical in assessing the health of Snowflake’s business, particularly as it navigates the challenges of slowing growth and increased investment spending.

If the company can maintain or even improve these metrics, it could help reassure investors that Snowflake’s long-term growth potential remains intact, even in the face of near-term headwinds.

Conclusion: A Pivotal Earnings Report

As Snowflake prepares to report its Q2 results, the company finds itself at a pivotal moment. The combination of slowing growth, increased AI investments, and a high valuation means that expectations are tempered, but still significant.

Investors will be looking for reassurance that Snowflake can manage its near-term challenges while positioning itself for long-term success in the rapidly evolving data and AI landscape.

The company’s guidance for Q3 and the remainder of FY25 will be particularly important, as will any commentary on customer consumption trends and the impact of AI investments on profitability.

If Snowflake can deliver on these fronts, it could help stabilize the stock and restore investor confidence. However, any signs of further deceleration or margin pressure could weigh heavily on the stock, given its recent performance and elevated expectations.

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