Tag: SNOW (Page 1 of 2)

AI has crashed onto the investing stage in 2023, driving significant stock price gains for several companies. Some, like Nvidia and Microsoft have already projected a direct revenue benefit as part of recent earnings reports. Others have indicated they expect AI to drive demand tailwinds going forward as part of management commentary.

Eventually, most software service and infrastructure providers should benefit from increased demand, as AI services proliferate and contribute to all areas of the economy. Because many AI services are delivered through Internet-based applications, the same guardrails of security, delivery, monitoring and operational data storage will be needed. This is in addition to the increased consumption of data services to collect, prep, distribute and process the inputs for various AI models.

AI-driven expert systems and co-pilots will raise the productivity of information workers. Enterprises will need fewer of them to accomplish the same amount of work. This will free up budget to increase spend on AI software services, similar to the efficiencies gained from the proliferation of SaaS tools over the last decade that helped internal business teams automate most aspects of their operations.

Software development teams, in particular, will experience a significant boost in output per employee. Enterprises will be able to clear their application backlogs more quickly, increasing the demand for hosting infrastructure and services. At steady state, fewer developers will be needed, supporting a shift of IT budget from salaries to software.

As data is the largest ingredient to these enterprise AI development efforts, software vendors providing data processing and infrastructure services stand to benefit. AI has further elevated the value of data, incentivizing enterprise IT leadership to review and accelerate efforts to improve their data collection, processing and storage infrastructure. Every silo’ed data store is now viewed as a valuable input for fine-tuning an even more sophisticated AI model.

In the realm of big data processing, enterprises need a place to consolidate, clean and secure all of their corporate data. Given that more data makes better AI, enterprise data teams need to ensure that every source is tapped. They are scrambling to combine a modernized data stack with an AI toolkit, so that they can rapidly, efficiently and securely harness AI capabilities to launch new application services for their customers, partners and employees.

At the center of these efforts are the big data solution providers. These include legacy on-premise data warehouses, cloud-based data platforms and of course, the hyperscalers. Among these, Snowflake and Databricks are well-positioned, representing the fastest growing modern data platforms that can operate across all three of the hyperscalers. While the hyperscalers will win their share of business, enterprise data team leadership often expresses a preference for an independent data platform where feasible.

Fortunately for investors, Snowflake and Databricks held their annual user conferences recently. Perhaps it was intentional that they fell within the same week – at least they staggered the events between the first and second half. Both companies made major product and partnership announcements, leading to many comparisons between the two and speculation about changes in relative product positioning.

The market for the combination of big data and AI processing will be enormous, with some projections reaching the hundreds of billions of dollars in annual spend. While the Snowflake and Databricks platforms are clearly converging in feature set scope, they still retain different approaches based on their historical user types. Such a large market will likely support multiple winners.

Snowflake’s consumption business continues to feel pressure as large enterprise customers look for ways to optimize usage. While it seemed that management had a handle on forecasting the impact of this effect when they lowered guidance back in Q4, they still underestimated the trend. With the Q1 report, they once again brought down the full year revenue target.

This had the expected effect of torpedoing the stock the day after earnings, with a post-earnings drop of 16.5%. After that, a strange thing happened. The stock began appreciating again and surpassed its pre-earnings price two weeks later. As with other software infrastructure companies, the market’s perception that demand for AI services will drive incremental usage is propping up the stock. Snowflake management added to this momentum with a few key announcements, including a preview of their upcoming Snowflake Summit conference, which will include a fireside chat with Nvidia’s CEO. This all implies that Snowflake is positioning themselves to benefit from increased AI workload demand.

In the near term, Snowflake is being directly impacted by their consumption model, which magnifies changes in customer behavior as they identify ways to reduce costs. Looking forward, the market is anticipating the moderation of these optimization headwinds, as enterprises work through the low hanging fruit of cost savings. At that point, Snowflake’s growth should return to its prior cadence driven by new cloud migration workloads and the expansion of existing ones.

Given that enterprise benefit from AI hinges on access to a consolidated, clean and secure data set, Snowflake is well-positioned to serve as a primary data source. Their positioning is further solidified as the same environment could be leveraged to run jobs that enhance the AI models. This applies to LLMs and other foundation models, as well as more traditional types of machine learning output like recommenders. Snowpark, Steamlit and other extensions that make the environment more programmable started this process. New acquisitions are bolstering the platform’s capabilities as well. Investors are looking towards announcements at the upcoming Summit user conference for more insight into Snowflake’s planned AI capabilities.

Leading up to Snowflake’s Q4 FY2023 earnings report, investors felt insulated from the risk of a low revenue guide for the full year. This concern had been abated in the Q3 report, as management blunted a reduced Q4 revenue guide with a preliminary estimate that FY2024 would deliver product revenue growth of 47%. During the Q3 earnings call, this had the immediate effect of propping up the lagging after-hours stock price.

When management lowered their actual guidance in the Q4 report on March 1st to reflect product revenue growth of 40% y/y, investors were disappointed. Expectations for higher growth had already been set. Stepping back though, without the pre-announcement, a 40% guide may have been fine. Combined with an adjusted FCF margin target for the year of 25% puts Snowflake in the rare position of maintaining performance above the Rule of 60 in a tough spending environment. That target would deliver about $700M in free cash flow for this year.

Compared to other software infrastructure peers, Snowflake enjoys one of the highest valuations. Its market cap is about $44B with a trailing P/S ratio of 21. With optimistic revenue estimates, this ratio comes down quickly. At analysts’ revised revenue target for FY2024 (current calendar year), the forward P/S ratio is 15.5. Looking out two years with the FY2025 revenue estimate for $4.024B in revenue, the forward P/S approaches 11. Currently, analysts are projecting a revenue growth rate of 38.9% for FY2025, which is just a tick below the revised projection for FY2024 (this year) for 40.2% revenue growth.

That linearity forms the crux of the Snowflake investment thesis. If the company can continue expanding into their seemingly uncapped TAM at a durable revenue growth rate around 40%, then the opportunity for upside is reasonable. Combined with an adjusted FCF margin of 25% (or more), a premium valuation multiple appears fair. The price to FCF multiple for FY2024 lands at about 63 – not outlandish considering that Snowflake more than doubled FCF over the past year.

Snowflake reported their Q3 FY2023 earning results on November 30th. The company beat revenue estimates, delivering 67% annual growth. The Q4 product revenue guide, however, missed expectations by about 2%, with annual growth decelerating to 49%. Initially, the market’s reaction was unfavorable, as the stock dropped by over 10% after hours. At the tail end of the guidance portion of the call, however, management shared a preliminary outlook for next year (FY 2024) for 47% revenue growth with 23% FCF margin. While the revenue guide was roughly inline, the implied FCF target was higher than analysts had modeled. SNOW’s stock price immediately began rising and ended the following day up 8%.

This movement underscores the situation for many software infrastructure providers currently. While investors have become attuned to the impact of the pressured IT spending environment, they are trying to see past the current macro headwinds. Coming off the Covid-inspired spending surge, macro is obfuscating post-Covid growth deceleration. Investors need to discern which companies would have maintained elevated growth for the next couple of years, separate from the broader impact of macro. Identifying the companies with real durable revenue and FCF growth could drive investment outperformance.

By effectively setting their baseline for next year’s revenue growth rate linear to the Q4 guide and increasing the FCF target, Snowflake is signaling that their growth rates are sustainable. Since a big part of the Snowflake valuation thesis hinges on the durability of revenue growth towards the $10B target by FY2029 (six years out), this guidance signals that target is achievable. Additionally, that can be accomplished with a significant increase in free cash flow, quickly approaching their 25% long term target.

Snowflake held a Snowday event on November 7th in San Francisco, as part of its Data Cloud World Tour. Similar to prior Snowdays, the Snowflake team used the occasion to showcase new product innovations and to interact with customers. During the event, they made a number of product announcements and program updates. The product team emphasized that these were not just a rehash of announcements made during the Summit conference in June, reinforcing the fact that Snowflake has been continuing to innovate on its platform.

One of Snowflake’s newer growth strategies, beyond their core data platform, is to enable other companies to build their businesses on top of Snowflake. The value proposition is that new companies with a heavy data processing function in their product can bootstrap their launch by leveraging Snowflake’s platform. There are multiple benefits in taking this approach, including reducing time to market, eliminating infrastructure overhead and avoiding hiring dedicated technical staff. Snowflake has invested years building out and refining their data platform for high scale operations.

In most cases, it doesn’t make sense for a new vertical software provider to build their own data platform, which arguably duplicates a lot of Snowflake’s functionality. Given Snowflake’s high volume, they are likely able to provide a new business with data processing capabilities for the same or lower cost than if they tried to manage their data platform themselves. This allows the new business to focus on their core competency, not figuring out how to build a big data solution.

After two quarters of mixed results, Snowflake reignited investor sentiment with their Q2 earnings report. Revenue beat prior estimates for the quarter by a large margin, with management upping forward projections as well. Customer activity was the highlight of the quarter with record additions of $1M customers and surprising linearity in DBNRR. As we are two quarters past platform optimizations, Snowflake may be starting to benefit from additional workload migrations by large customers. Looking forward, their product strategy to expand the reach of the Data Cloud and bring application development directly onto customer data should provide additional drivers of platform utilization.

Snowflake held their annual user conference, Snowflake Summit, in Las Vegas last week. This included a number of product announcements and followed their Q1 earnings report, where the CEO promised “our most significant product announcements in four years.” Beyond the new product features, Snowflake updated their overall platform positioning and provided insight into future product directions. Mixed in with this was an Investor Day session, which included more granular financial detail. In this post, I will focus on the platform updates and product strategy, as I they provide the foundation for the next phase of Snowflake’s growth.