Title: Analyzing Snowflake's Stock: Is the Drop a Temporary Glitch or a Major Trend?
In recent times, Snowflake's stock (NYSE: SNOW) has lagged behind in the software industry, dipping by about 11% while the S&P 500 gained a staggering 28% in the same duration. So, what's the deal with Snowflake's underperformance? Let's delve into the reasons behind this trend.
Snowflake's Struggles
Several factors have contributed to Snowflake's sluggish progress. First off, the stock has traditionally been priced expensively, which unfortunately capped its growth during the broader enterprise software surge. Currently, Snowflake trades at approximately 180x estimated FY'26 earnings.
Besides its pricey valuation, Snowflake also had a rocky patch in early 2024. The company reduced its FY'25 guidance and failed to meet its quarterly earnings estimate in the opening quarter of the fiscal year. These incidents didn't exactly boost investor confidence in Snowflake's stock.
Competition is another obstacle Snowflake has been grappling with. Rivals such as Databricks have been making significant strides, with Databricks reporting an impressive 60% year-over-year growth in Q3 compared to Snowflake's 29% growth. Databricks recently raised about $10 billion in funding, which values the company at around $62 billion.
Databricks' core competencies in machine learning and big data processing have been cutting into Snowflake's image as a cloud-based data warehouse solution, leading to a skewed perspective around the former. Furthermore, Google's BigQuery and Microsoft Fabric cloud data analytics platforms also pose potential threats to Snowflake, particularly due to their integration with their respective cloud ecosystems.
Potential Silver Linings
In spite of these challenges, Snowflake remains well-positioned to continue thriving as the industry transitions from on-premise databases to cloud-based warehousing solutions. Snowflake leads the market, as its product is compatible with multiple cloud platforms such as AWS, Google Cloud, and Azure while also offering extra flexibility in terms of separating billing for storage and computing.
Snowflake's dominance in the cloud data warehousing market also puts it in a favorable position to capitalize on the growth within the generative AI sphere. With over 10,000 companies using Snowflake's AI Data Cloud to manage their businesses with data, AI, and applications, the growth potential is significant.
Furthermore, Snowflake's product boasts exceptional stickiness, with a net revenue retention rate of 127% in October 2024. Snowflake's remaining performance obligations, which indicate contracted revenue, grew 55% year-over-year to $5.7 billion, highlighting the robust customer base.
Snowflake has also been staying innovative, regularly updating its AI and machine learning functionalities with products such as Cortex. This new feature provides AI and machine learning solutions for Snowflake users, which should boost consumption and billings on the platform.
The company's margins are also expected to improve as revenues grow and fixed costs absorb more effectively. For instance, operating margins over the last quarter stood at around 6%, which is a noticeable improvement from negative levels in the previous year.
Despite Snowflake's underperformance, it's worth noting that the company's stock returns have shown some volatility in the past 4 years. Returns in 2021 were positive at 20%, while 2022 saw a significant dip of -58%. However, the company recovered in 2023, posting a return of 39%, and in 2024, returns were once again negative at -22%. It's essential to consider the overall context and potential factors that could influence the stock's performance in the future.
In conclusion, while Snowflake has its setbacks, its commitment to AI and ML expansion, leadership changes, and slight upward revisions in earnings estimates present opportunities for growth. The company has also been drawing investor interest, which could ultimately drive the stock's price upward.
Snowflake's struggles with high valuation and competition from rivals like Databricks have led to some challenges in revenue growth, as evidenced by the company's 29% year-over-year growth compared to Databricks' 60%. However, Snowflake's dominance in the cloud data warehousing market and its AI Data Cloud, which is used by over 10,000 companies, may help boost its revenue through the potential growth of generative AI. In the winter landscape of the software industry, Snowflake, like a unique snowflake, continues to offer value to its users, showcasing that its revenue potential is not merely melting away.
