SNOW earnings 3/2 – Cloud secular play
Snowflake reports earnings on 3/2 and they have a lot of tailwinds coming from the strong Microsoft and Amazon cloud numbers. SNOW is making history as it’s poised to be the fastest software co. to reach $1b in revs since product launch which makes it one of the most powerful growth stories in software. SNOW’s original focus was to disrupt the data warehousing market, which is a large & strategic market and which companies use to build cross-enterprise analytic insights. The first offering fully GAed in 2015 on AMZN AWS; it was then rolled out to MSFT Azure in 2018 and finally made available on GOOG GCP in 2020. It now has presence across 22 regions globally with services that consist of three independent layers across storage, compute and cloud services.
They have pioneered a Cloud Data Platform (expands workload/use-case capabilities) and Data Cloud (adds unique data sharing & exchange services), in the public cloud. It offers true multi-region and multi-cloud deployment across AWS, Azure, and GCP utilizing a single unified data layer. They have some unique capabilities which provide a moat. Micro-partitioning is part of SNOW’s secret sauce. It enables the data to be split up into small files called “micro partitions” based on size, which improves query processing as the system retrieves only the data applicable for user queries, as opposed to having to scan entire tables or columns. This data is then catalogued on SNOW’s metadata architecture so it can keep track of data stored in object stores. This is what enables SNOW to generate high-performant read/write jobs and analytical processing on a storage architecture. Multi-cluster computing is another part of SNOW’s secret sauce that allows multiple clusters (or virtual warehouses) to query the same data. Multi-clustering acts as a load balancer that allows for an unlimited amount of concurrency without limiting performance within a shared data infrastructure environment. Traditional systems typically use shared-nothing or shared-disk approaches, both of which typically require attached storage or networking interconnects that are not elastic and are constrained by dedicated compute resource allocation requirements; and they tend to generate multiple copies of data due to the need for attached storage across different cluster environments.
Financial performance:
SNOW did $592M in revenue for FY21 (year end Jan 2021) and analysts have them over $1B for FY 2022 (year end Jan 2022). They will report their Q4 FY’22 on 3/2. Their Q3 FY’22 earnings were a blowout. They reported revenue of $334M vs target of around $305M and EPS of $0.03 vs street view of a ($0.06). Management raised FY’22 product rev guidance from $1,060-$1,070m (+91-93%) to $1,126-$1,131m (+103-104%). FY’22 op margin guidance was raised from -9% to -4% & FCF margin guide was raised from 7% to 8%. 4Q product revs guide of $345-$350m (+96% at high-end) above most analysts estimates of around $316m (+77%). 4Q op margin guidance of 1% was well above Street prior est of -6.7%.
Why is a there a possible earning beat and raise coming in March:
SNOW has a very strong co-sell strength with AWS. GOOG’s BigQuery is in in coopetition with SNOW. GOOG has an aggressive bundling strategy, often bundling advertising and GCP add-ons at steep discounts. How do I know this. I head corporate strategy and development for my infrastructure and analytics software company. SNOW has superior technology and in some large accounts BQ could not displace SNOW for this reason. We are involved in a number of these deployments opportunities where GOOG BQ and SNOW are being considered. We also see Redshift in small accounts but in big strategic deals AWS partners with SNOW as they would still get the infrastructure business and they don’t want to lose the deal to Azure or GCP. SNOW has a strong & inflecting co-selling relationship with AWS and is a major customer. Our customers on Teradata, Netezza, SAP HANA, CLDR, SQL Server, and ORCL are migrating of these platforms. We partner with companies that extract, load and clean data that goes into cloud. The vast majority of their customers are porting this data to SNOW. They don’t really compete against most of these companies including MSFT, GOOG and the others noted above because companies have already decided to migrate off them.
SNOW launched two industry-specific clouds during Q3 - Financial Services Data Cloud and Media Data Cloud - which should drive growth within two of SNOW’s strongest verticals. During the qtr SNOW also launched Powered by Snowflake, a program which helps companies build and promote apps in the data cloud and is designed to accelerate the delivery of cloud apps on SNOW’s platform. The number of registered partners on Powered by Snowflake grew 137% Q/Q while product revenue from those partners grew 173% Y/Y. 175+ companies are currently designing their apps on SNOW.
Revenue predictability is strong. Net revenue retention rate on Q3 was 173% (vs. 170% Q2 ). This means that for every dollar a customer starts with they purchase another $0.70. In their last earnings announcement, management expected to remain above 160% this year and firmly above the 130-140%+ levels for quite some time. Total customers of 5,416 grew 52% Y/Y (vs. 60% last qtr), with net new customers of 426 (vs. 458 last qtr and 437 in the year-ago quarter). SNOW now has 148 customers paying >$1m in product revenue, up 128% Y/Y (vs. 116 last qtr and 65 a year ago), with 32 net new >$1m customers vs. 9 last year. SNOW has 223 F500 customers, up 30% Y/Y (vs. 215 last qtr and 171 a year ago).
SNOW has primarily a consumption based model, so the more you use they more you pay. The average customer consumes its first-year contractual consumption purchase within roughly 10 months. It typically takes ~2-3 months before workloads are up & running, then ~6-8 months before credits are burned) at which point they renew for much higher capacity commitments; by the end of year 2, the average customer is spending ~3x the original contract, and within a year from that, the cohort doubles spend, resulting in the customer spending ~6x the original contract by the end of year. They are also free cash flow positive so their revenue is higher than their operating expenses and capital expenditure investments. They are not eating up their cash.
Recent Morgan Stanley upgrade article from CNBC:
Morgan Stanley says investors should consider picking up shares of data-analytics software company Snowflake after a big pullback in recent months.
Analyst Keith Weiss upgraded shares of Snowflake to overweight from equal weight. The firm also hiked its price target on the stock to $390 from $344. The new projection implies 41.5% upside from Snowflake’s closing price Friday.
“With the core data warehousing business outperforming, new nascent expansion opportunities gaining steam, and significant FCF (free cash flow) generation within reach, investors are undervaluing the durability and quality of growth at Snowflake,” Weiss said in a note Monday.
High-growth tech stocks have struggled this year as investors braced for the Federal Reserve to hike interest rates and tighten monetary policy to address inflation. Growth stocks trade on the promise of big earnings in the future, so tech shares are often susceptible to declines from rising rates due to their high valuations.
Snowflake is down nearly 32% from its November high. The stock rose 3.9% premarket Monday.
As such, Morgan Stanley says Snowflake’s “growth-adjusted valuation has gone from premium to discount.”
The company is reporting better-than-expected fundamental results, Morgan Stanley emphasized. Snowflake’s calendar year 2022 revenue guidance is ahead of the firm’s projections.
Snowflake should also benefit as its market expands, with cloud-based data platforms growing in acceptance, according to Morgan Stanley.
“Catalyst path going forward — more durable growth, more TAM (total addressable market) expansion, and faster path to meaningful FCF should drive upside,” Weiss said.
Snowflake shares are down more than 18% this year after a 20% gain in 2021.
—CNBC’s Michael Bloom contributed reporting.
Risks:
The stock has run up the past few days after really getting beat down with the big tech sell off as people moved to safer, profitable companies.
There are some big estimates they have to beat in Q4’22 and guide above 50% growth for FY’23 which gets harder to do at their size.
The stock is crazy volatile and companies that are unprofitable are being kicked to the curb.
They are expected to lose around ($0.10) this quarter and any significant increase in expenses will likely tank the stock.
Why I am bullish:
What I see from where I sit is that this company is only gaining more traction based on what my company sees in the market.
Companies are increasing their move to data in the cloud and spending more on digital transformation.
A number of people are bullish on SHOP as a sentiment play on AMZN. I think the sentiment and secular growth for AMZN is in AWS and SNOW is a direct beneficiary of this.
Full disclosure, I had a a share position on SNOW, but sold it during the recent tech downturn. I’m waiting for a good entry point running into earnings.
I am not that great on technical analysis (why I am learning here) and will leave it up to others more capable than me to comment on that.