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DocuSign Inc. Earnings (DOCU)
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1:30 PM GMT : Initial Jobless Claims
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7:00 PM GMT: Federal Budget Deficit
❄️ Snowflake: Valuation Concerns?
Cloud-computing company Snowflake Inc. (SNOW) reported Q4 revenue growth that surpassed analyst estimates. Despite revenue growth of 101% Y-o-Y, the stock fell 28% over four days, nearing the lows of May 2021. What gives?
Fall From Grace?
When it went public in 2020, Snowflake was the largest IPO of the year, valued at a staggering $120B. When we last wrote about the company last November, shares were back to trading near record highs after bottoming out in May. That is despite its prior 12-month price-to-sales ratio of more than 130X.
Snowflake runs on a consumption-based revenue model and earns when customers store data and run queries on its platform. That is the company's major differentiating factor from other software companies, which charge a subscription charge every month. Snowflake customers have the flexibility to time their consumption even beyond the contract period.
Snowflake's revenue in Q4 was ahead of street expectations while the loss per share narrowed.
Key Highlights From Q4:
Revenue: $383.8M Vs $372.6M expected
Loss Per Share: $0.43 Vs $0.51 in Q3
Adjusted Gross Margin: 70% Vs 70.9% expected
Net Loss: $132M from $199M Y-o-Y
The company has doubled its revenue every quarter of the year, with the most recent quarter clocking 101%. This was, however, the slowest the company has grown since going public. At the end of the quarter, the company had 5.9K customers and 184 of them with a trailing 12-month product revenue in excess of $1M. Headcount rose 60% during the year to cross the 4K mark.
For the full fiscal 2022, Snowflake's product revenue was a record $1.1B. The percentage of recurring revenue from existing customers for the year was 178%. It also closed seven deals with a value of at least $30M during the quarter compared to just one during the same period last year.
Even if revenue grew over 100% Y-o-Y, the fact that the company had yet to turn profitable weighed on investors’ minds. Snowflake’s management pleaded for patience, but investors’ patience was wearing thin.
Where Are The Issues?
With such sturdy growth rates, where did shareholders find issues? The company is tweaking its business model to deliver lower costs for clients - which means lower revenue for itself! For fiscal 2023, Snowflake projected revenue of ~$1.89B. That figure implies a growth rate of 65% to 67%, which is far lower than the 100%+ growth the business has seen over the last six quarters.
Snowflake’s management is confident that while this may result in a near-term revenue hit, it will enable customers to deploy more services to its platform, looking at the lower costs. CEO Frank Slootman, in fact, believes it will take time for investors to appreciate the company’s revenue recognition model.
Today, Snowflake trades at a full year price-to-sales ratio of 55.16x. While even this may seem excessive compared to some other companies, the fact that this is the result of more than a 50% drop from November may indicate how high the expectations for Snowflake were.
Back in 2020, when everything an investor touched turned to gold, Snowflake's valuation was brushed under the carpet as long as it fitted the "growth stock" tag. With the same growth now on the wane, in a rising interest rate environment, and an equally volatile stock market, investors struggle to find comfort in what was otherwise a SaaS favourite.
Frank has tried being frank with his investors. Frankly speaking, the ball now lies in their court. Has he convinced them? The early evidence, to be frank, is not very encouraging.
Market Reaction
SNOW ended at $207.56, up 8.32%.
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