SUN VALLEY, IDAHO - JULY 06: CEO of Snowflake Frank Slootman arrives at the Allen & Company Sun ... [+] Valley Conference on July 06, 2021 in Sun Valley, Idaho. After a year hiatus due to the COVID-19 pandemic, the world’s most wealthy and powerful businesspeople from the media, finance, and technology worlds will converge at the Sun Valley Resort for the exclusive week-long conference. (Photo by Kevin Dietsch/Getty Images)
Shares of Snowflake have been on a bumpy ride since the cloud data platform provider’s IPO nearly two years ago.
After opening at $240, the stock rose until December 2020, fell sharply until May 2021, and then headed up to peak at $405 last November. Since then, Snowflake stock went down sharply until May 2021, when it began a 34% rise to about $160 on Wednesday.
On August 24, Snowflake announced expectations-beating results that I think make the stock a screaming buy. In pre-market trade, its shares are up nearly 19% to about $190.
Why the rise? Snowflake has returned to beating Wall Street growth expectations and raising guidance which is what makes stock prices go up.
(I have no financial interest in the securities mentioned).
Snowflake beat growth expectations and boosted its top-line guidance above the consensus. However, its loss was larger than expected.
Here are the details from CNBC:
Snowflake CEO Frank Slootman is bullish. As he said in the fiscal second-quarter earnings call, “Snowflake's next frontier of innovation is aimed at transforming how cloud applications are built, deployed, sold, and transacted. We look forward to executing against this growth opportunity.”
Investor’s applause for this report provides useful insight into what matters most. Investors are willing to forgive losses if a company is growing faster than they expected.
They are also willing to forgive a substantial growth slowdown. As I wrote last September, in the year ending January 2020, Snowflake’s sales soared 173.7%. Its growth steadily slowed down after that — 121% growth in the second quarter of 2020; 104.5% in Q2 2021, and a forecast of 90% growth for the third quarter of 2021.
Simply put, investors clearly do not expect Snowflake’s growth rates to return to triple digits anytime soon.
To assess whether to invest in a specific stock, investors should consider whether a company has what it takes to win and keep customers. By one measure — net revenue retention, Snowflake is hitting it out of the park at 171%. This means that its existing customers are spending much more on Snowflake’s platform.
The reason they spend more is that Snowflake enables organizations to operate more efficiently.
Through a collaboration with AWS, Snowflake helps deliver SageMaker Data Wrangler — a program that cuts the time to pull together data for machine learning from “weeks to minutes,” Amazon AMZN told me last September. Companies that use Amazon SageMaker Data Wrangler can use Snowflake as a data source without writing any code.
SageMaker Data Wrangler helped a paper company to boost quality dramatically. As Bratin Saha, Amazon AI VP and General Manager of Machine Learning Services, told me, “SageMaker is growing fast because it creates valuable customer insights. For example, Georgia Pacific used [our product] to optimize the speed of paper manufacturing to improve quality by 40%.”
Western Union — which helps people and companies move money through more than 550,000 agent locations — has boosted revenues and marketing success thanks to Snowflake. Pavan Yerra, Senior Director in WU’s Chief Data Officer organization, told me last September that Western Union’s partnership with Snowflake and AWS boosts revenues by increasing WU’s marketing success rate through more effective targeting of offers to groups of customers with a higher propensity to purchase.
Another reason that Snowflake grows so fast is that the product is very easy for companies to set up and try. As Morningstar analyst, Julie Bhusal Sharma wrote, Snowflake’s expectations-beating growth is sustainable “due to a snowballing effect which has Snowflake making traction upmarket. We think such success lies in the ease of setting up and trying out the Snowflake platform, which involves little upfront costs due to the company’s consumption model.”
As long as Snowflake’s technology can help boost the effectiveness and efficiency of its growing customer base, its expectations-beating growth is likely to persist.
These days the trajectory of stock prices depends on forces beyond the control of CEOs and investors.
For example, this week’s Fed meetings in Jackson Hole could drive up the market if Fed Chair Jerome Powell signals that interest rates might rise more slowly than investors had expected — or stocks could plunge if inflation for August is above expectations.
In that context, a Piper Sandler analyst suggested that Snowflake stock is a “rainbow in the dark” — prompting him to increase his price target 34% to $220 per share. His client note said, “Large deal momentum in Europe, one of the most macro-challenged geographies, was a particularly encouraging sign that data operations and analysis remain a vital and expanding investment category in any environment.”
Not all analysts were as bullish. For example, a Rosenblatt analyst cut the price target by $10 to $245 “to reflect lower comparable multiples and higher interest rates.” Nevertheless, he expects Snowflake to keep growing rapidly and to achieve higher margins “over the next few years.”
Expectations-beating growth and customers who buy more over time bode well for Snowflake bulls.