Snowflake (NYSE:SNOW)
Snowflake (NYSE:SNOW), a data cloud provider, released its financial results for the fiscal fourth quarter after the market close on Wednesday. The company’s stock has been quite pricey but has also had rapid sales growth in recent years. The recent report revealed growth is slowing significantly, which is bad news for investors given the high premium being asked.
Total revenue for the fiscal Q4 2023 period ending in January was $589 million, an increase of more than 53% year over year. Investors have gotten used to top-line beats ever since the company went public, so the stated amount did not come as much of a surprise. This decreased from the previous two quarters, which had surpassed sales estimates by $30 million and $18 million, respectively, on lower revenue forecast bases.
Investors and analysts have been closely monitoring product revenue since it accounts for most of the company’s overall revenues. The fourth quarter was very productive, with a growth of almost 54%. At first glance, it seems like a healthy sum. Still, as the graph below illustrates, it represents a decline compared to the several previous quarters. Compared to a year ago, quarterly revenue has more than doubled.
During the first quarter of the fiscal year, management is anticipating a product revenue increase of 44% to 45%. Since product sales growth often tracks overall growth, this projection is on the low side compared to what analysts were expecting (total revenue growth of 46.5% in the timeframe). Guidance here called for a 40% product revenue increase for the year, although analysts expected roughly 47% total growth. That’s the leading cause of the stock’s decline after the market close, but I’ll get to the value in a minute.
Several variables are involved. Secondly, the organization is comparing itself to more excellent statistics from a year ago, which might reduce the growth rate. Total revenues rose from Q4 2017 to Q4 2018, albeit slower than in the previous two quarters. Another factor is that most economists anticipate a recession, so top brass may have been playing it safe with initial projections. If conditions improve, you may always increase advice, but you should avoid lowering your projection.
For the purpose of this post, I’d want to zero in on two crucial measures that are exhibiting symptoms of weakness. The first is the fall from 178% to 158% in the net revenue retention rate during the last year, with 13 percentage points of that reduction occurring in the year’s second half. Even if they are over 100%, things are currently rough. Nevertheless, as shown in the graph below, the company’s remaining performance responsibilities grew by 38% in Q4. This figure dropped from 99% one year before and by over 30% in only one quarter.
Like many other young IT businesses, Snowflake has significant losses when accounting for GAAP expenses. More than $207 million was lost in the fourth quarter, up from $132 million in the same period a year earlier. Non-GAAP earnings per share came in at 14 cents, 9 cents more than the market expected. This was achieved by excluding stock-based compensation and amortization of purchased intangible assets. When calculating losses using GAAP, the corporation lost about $800 million in the fiscal year, an increase of around $117 million from the previous full year.
In conjunction with its Q4 results, the business announced a $2 billion share buyback program. In the most recent fiscal year, free cash flow amounted to almost $500 million. The nearly $5 billion in cash and investments will show investors that the money is being put to use. Sadly, owing to enormous stock-based compensation, such repurchases may not reduce the share count much. The number of diluted shares calculated under GAAP for the fourth quarter was about 322 million, up by more than 13 million from the same time in the preceding year.
Valuation is Snowflake’s biggest problem. The growth figures are encouraging, but the stock traded 16.5 times this year’s estimated sales before this week’s announcement. After the Federal Reserve began raising interest rates, investors shied away from such brands. Since then, the price-to-sales ratios of several comparable but slower-growing brand names have fallen back to the high single digits or low double digits. The average price objective from analysts on Wall Street as of Wednesday was $186, meaning a further 20% gain from the previous day’s finish. In the after-market, shares dropped by almost $9.
Snowflake’s slowing growth trend was confirmed in the fiscal Q4 report. This decline in percentage terms was anticipated, but the future forecast seems like it could be better, with an apparent deterioration in specific important parameters. Although this is one of the most sought-after pieces of software on the market today, its price tag is hefty. At stake is whether or not investors believe a super premium value is justified in light of the rapid slowing of growth rates.
Featured Image: Megapixl © Andreistanescu
