COF-R02 benefits - Snowflake SnowPro Core Recertification Updated: 2024

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Snowflake SNOW released its third-quarter earnings report on Nov. 29. Here’s Morningstar’s take on Snowflake’s earnings and stock.

Key Morningstar Metrics for Snowflake

What We Thought of Snowflake’s Earnings

Snowflake’s third quarter was mixed, in our view. Revenue came in above our expectations while the bottom line came in under, as we had rosier expectations than the market. Encouragingly, though, full-year fiscal 2024 guidance was raised for revenue and profitability. Shares have popped 7% upon results, inching the stock somewhat closer to our $231 fair value estimate while leaving room for ample upside.

Overall, Snowflake is extremely well-positioned to benefit as the world is rapidly collecting more data, which requires both a place to live and a playground like Snowflake’s to work with to extract more value. While these are passive tailwinds, we think Snowflake’s technical expertise and execution will make it more than a passive beneficiary in data management software. We still believe the name is a top pick under our technology coverage.

Snowflake reported third-quarter revenue of $734 million and product sales of $699 million, growing by 32% and 34% year over year, respectively. Solid results came thanks to execution and a stabilizing macroeconomic environment. Management noted that they hardly hear “AI” and “budget” in the same sentence, and we think this leaves the firm in a sweet spot, with customers eager to be at the forefront of cutting-edge technology. We think this safeguards the uncertainty that can come with a consumption-based revenue model.

We think Snowflake has a clear path to reach over $22 billion in revenue by 2033, paired with GAAP operating margins past 27%. Such a trajectory relies on strong switching costs, which continue to be exemplified by strong net revenue retention rates (135% as of October). We believe Snowflake is acting wisely by investing heavily in customer acquisition now to reap massive benefits later.

The company’s fourth-quarter outlook includes year-over-year growth in product revenue at a midpoint of 29.5%. Fiscal 2024 product revenue is guided for year-over-year revenue growth at a midpoint of 37% (an increase from 34% previously). Non-GAAP operating margins are expected to be 4% in the fourth quarter and 7% for the overall year. Despite the favorable boost to the outlook, we caution investors not to be overly eager for significant upside this year beyond guidance. Snowflake has a slew of new products going into public preview this year, which will be a temporary headwind for margins as associated costs start to get capitalized. Nonetheless, we think the new product investments will pay off, as we foresee ample scale ahead.

Fair Value Estimate for Snowflake

With its 4-star rating, we believe Snowflake’s stock is undervalued compared with our long-term fair value estimate.

Our fair value estimate is $231 per share. Our valuation implies forward fiscal-year enterprise value/sales of 25 times and a free cash flow yield of 1%. Our assumptions are based on our expectation of Snowflake achieving a compound annual growth rate of 34% over the next five years and 26% over the next 10 years. Snowflake is in its infancy, but it has a massive market opportunity and a large runway for growth.

This substantial growth is driven by workloads continually shifting to a cloud environment, resulting in Snowflake accumulating more share of the overall database management system market. Our forecasts also assume substantial usage growth per customer, as we expect customers to scale their data storage significantly after migrating to the cloud due to reduced costs and the ease of such scaling.

Read more about Snowflake’s fair value estimate.

Economic Moat Rating

We do not think Snowflake has a moat. Though the firm benefits from switching costs and a network effect, protected by its unique multi-cloud strategies, we cannot say with complete certainty that this will lead to excess returns on invested capital 10 years from now, given its limited public history and significant current lack of profitability.

Snowflake is a fast-growing provider of data lake, data warehousing, and data sharing solutions. The company’s value proposition lies in overturning the faults of existing data storage architectures and even more recent methods of storing data in the cloud through its combined data lake and data warehouse platform. The rise of the public cloud has resulted in an increasing need to access data from different databases in one place. A data warehouse serves this need. Data lakes are used to store not just structured data within a database or data warehouse, but also data that is not yet fully indexed (either unstructured or semistructured data). This data in a lake is ingested into AI models to create novel insights. These insights are indexed and therefore are considered structured data, which is then housed in a data warehouse to easily be queried.

We think Snowflake’s switching costs are strong even without locking in multiyear subscriptions. Roughly 93% of the firm’s revenue is consumption-based, meaning it is not a subscription-as-a-service company. Clients typically commit to set consumption rates on an annual basis. We think Snowflake benefits from a network effect in its data-sharing business. It’s the only platform that allows for the sharing of data sets in a multi-cloud fashion through the Snowflake Data Marketplace, and this data can be purchased by other companies.

Snowflake is a key supplier for a host of enterprises. We ultimately foresee the firm achieving massive growth, but it’s racking up significant operating losses during its growth phase. Such growth is a necessity for the company to generate excess returns on capital, and it’s a bit early in its lifecycle for us to have absolute certainty that it can earn these returns in the long run.

Read more about Snowflake’s moat rating.

Risk and Uncertainty

Snowflake runs the risk that other cloud-neutral software will enter its market, or that a public cloud company will open its data warehouse and data sharing to be interoperable outside its cloud. While we think it’s unlikely that either Amazon.com AMZN will open AWS or Microsoft MSFT will open Azure, they have vastly greater resources to compete in this space if they so choose.

Furthermore, Snowflake is at risk of compromising the data on its platform, either through data breaches or in the case compliance tools are unable to do their job. For example, the firm offers a number of features for ensuring data is compliant with regulations like the General Data Protection Regulation.

Read more about Snowflake’s risk and uncertainty.

SNOW Bulls Say

• Snowflake could remain the only multi-cloud offering of its kind for much longer than anticipated, letting it increase its top line more with minimal pricing pressure.
• Snowflake could move to a subscription model from a usage-based one, boosting the monetization of its products.
• Snowflake could expand to other multi-cloud data needs, pushing spending per customer to greater heights.

SNOW Bears Say

• Other multi-cloud data providers may emerge to compete with Snowflake, or in-house data warehouses at AWS or Azure could potentially adopt a multi-cloud strategy.
• Snowflake could fail to expand its data-sharing network extensively, leaving it vulnerable to competition with larger networks.
• Migration of existing workloads to the cloud could occur at a slower pace, extending Snowflake’s unprofitable years.

This article was compiled by Adrian Teague

A winter wonderland calls to mind piles of fluffy, glistening snow. But to reach the ground, snowflakes are swept into the turbulent atmosphere, swirling through the air instead of plummeting directly to the ground.

The path of precipitation is complex but important to more than just skiers assessing the potential powder on their alpine vacation or school children hoping for a snow day. Determining snowflake fall speed is crucial for predicting weather patterns and measuring climate change.

In Physics of Fluids, researchers from the University of Utah report snowflake accelerations in atmospheric turbulence. They found that regardless of turbulence or snowflake type, acceleration follows a universal statistical pattern that can be described as an exponential distribution.

The article, "A universal scaling law for Lagrangian snowflake accelerations in atmospheric turbulence," is authored by Dhiraj Kumar Singh, Eric R. Pardyjak, and Timothy Garrett.

"Even in the tropics, precipitation often starts its lifetime as snow," said author Timothy Garrett. "How fast precipitation falls greatly affects storm lifetimes and trajectories and the extent of cloud cover that may amplify or diminish climate change. Just small tweaks in model representations of snowflake fall speed can have important impacts on both storm forecasting and how fast climate can be expected to warm for a given level of elevated greenhouse gas concentrations."

Set up in a ski area near Salt Lake City, the team battled an unprecedented 900 inches of snow. They simultaneously filmed snowfall and measured atmospheric turbulence. Using a device they invented that employs a laser light sheet, they gathered information about snowflake mass, size, and density.

"Generally, as expected, we find that low-density 'fluffy' snowflakes are most responsive to surrounding turbulent eddies," said Garrett.

Despite the system's complexity, the team found that snowflake accelerations follow an exponential frequency distribution with an exponent of three halves. In analyzing their data, they also discovered that fluctuations in the terminal velocity frequency distribution followed the same pattern.

"Snowflakes are complicated, and turbulence is irregular. The simplicity of the problem is actually quite mysterious, particularly given there is this correspondence between the variability of terminal velocities—something ostensibly independent of turbulence—and accelerations of the snowflakes as they are locally buffeted by turbulence," said Garrett.

Because size determines terminal velocity, a possible explanation is that the turbulence in clouds that influences snowflake size is related to the turbulence measured at the ground. Yet the factor of three halves remains a mystery.

The researchers will revisit their experiment this winter, using a mist of oil droplets to obtain a closer look at turbulence and its impact on snowflakes.

Snowflake — a mobilizer of enterprise data through a company’s data cloud — exceeded investor expectations in its most recent financial report, according to MarketWatch.

While Snowflake’s shares closed December 5 at $186 a share — 52% below their November 2021 high — the company’s November 29 third quarter report seems to have boosted its stock price by 8%.

Will Snowflake continue to beat expectations? Based on my recent interviews with company executives, a Goldman Sachs analyst, and a Snowflake customer — Freddie Mac’s chief data officer — the data platform provider has several factors working in its favor, including:

• More spending on Snowflake’s services.
• High return on customer investment.
• Building new services to satisfy new customer needs.

Snowflake faces several risks — including competition from hyperscalers like AWS and others, the possible failure of its compliance procedures, and slower than expected migration to the cloud, according to Morningstar.

However, the company appears to be riding a cresting wave of demand and is well-positioned to capture a significant share.

Snowflake’s Third Quarter 2023 Performance and Prospects

Snowflake stock rose 7.6% after the company reported expectations-beating results on November 29.

Here are the key numbers from MarketWatch:

• Q3 product revenue: $698 million, up 34% and $19 million above analyst estimates.
• Q3 Adjusted earnings per share: 25 cents — up 127% and nine cents per share above estimates.
• Q3 net revenue retention rate: 135%.
• Q3 customers with over $1 million in revenue: 436.
• Q4 revenue guidance: a range between $716 million and $721 million — the midpoint of which is about $22.5 million more than estimates.

“These results reflect strong execution in a broadly stabilizing macro environment,” CEO Frank Slootman said in a release.

Snowflake enjoyed increased demand in the third quarter. In a December 4 interview, Slootman told me, “We grew revenue 34% in the latest quarter. The big takeaway to read into it is the markets have stabilized.”

He added that in “Q4 22, Q1 23, and Q2 23 we saw disruption as people focused on rationalization and getting rid of stuff. We reset guidance based on our consumption model. The financial world does not love the consumption model on the way down. In Q3 we maintained our guidance. We see continued strength and raised our Q4 guidance.”

More Spending On Snowflake’s Services

Due to Snowflake’s consumption model — where customers pay for what they use, rather than a fixed per person monthly fee — the company’s revenues fluctuate with demand.

Despite push back from investors, Snowflake sees the consumption model as the wave of the future. “The consumption model is positive for the entire sector,” Slootman said.

“I was previously CEO of ServiceNow NOW which has a traditional subscription model,” he added. “I thought the model was unfair to customers to charge them on a per user per month basis whether they used it or not.”

Investors like the predictability of the traditional SaaS model but customers have mixed feelings about it. As he told me, “The consumption model is great for customers on the way down — since they do not pay for what they do not use. However, on the way up, they pay more to use more and they don’t like it.”

Earlier in 2023, customers were consuming less. Now they are increasing their spending. “We came out of a period of irrational exuberance during the pandemic. There was over caffeinated spending,” he said. “The bill came due and companies rationalized and optimized in reaction to the prior several years.”

By diversifying its customer base, Snowflake is less likely to experience such future fluctuations. “Over the last four or five years, our business was mostly digital natives,” Slootman told me.

He added, “Since then we have layered in traditional companies — such as banks, manufacturers, health care, and retailers. We are more stable now. It won’t happen again.”

High Return On Customer Investment

Snowflake customers say they get value from the company’s products. I have previously written about how Goldman Sachs and State Street STT have benefited. In a nutshell, they value getting faster access to the data they need to make better decisions.

Freddie Mac is getting faster answers with Snowflake. On December 5, Aravind Jagannathan, vice president chief data officer at the company, told me, “In 2019 we wanted to move our data from on-premises to the cloud. We wanted to be quicker in providing insights from the data while reducing the risk of having multiple copies of our data moving back and forth.”

Freddie Mac picked Snowflake for its faster speed to market and better query performance. “A report that used to take until 3 pm to deliver arrived at 8 am,” Jagannathan said. He added, “Processing that used to take 12 hours is now done in 35 minutes. A capital report that used to take many hours can be done in 10 minutes.”

Freddie Mac will take its time on using Generative AI. “We are being thoughtful about regulators and senior management,” he said. “Snowflake can support Generative AI. We are going to make sure we have the right data governance and have identified the right use cases.”

New Services To Satisfy New Customer Needs

The world changes fast and companies can only keep growing if they position themselves to take advantage of those changes in ways that benefit customers.

Snowflake’s technology has evolved in the direction of greater flexibility for customers. “We used to offer data warehousing for a very specific use case of making batch processing data available for analytics,” Slootman said.

He continued, “We have added many different kinds of workloads. Now we have a platform based on all kinds of live data. Now the work is going to the data. It is easy to inquire about what is happening now in the business. We are working towards enabling users to ask ‘What will happen next quarter? Why? Will it happen again? What should we do about it?’”

Generative AI will contribute to realizing Slootman’s vision for a forward-looking decision support system. According to my December 4 interview with Sridhar Ramaswamy, Snowflake’s senior vice president of AI, “Fidelity uses Snowflake as its platform of record for all data. If they want a global picture it can be done easily with live data through Snowflake.” (Ramaswamy previously led Neeva, a search service powered by AI without advertisements, that Snowflake acquired in May 2023).

To that end, it sounds to me as though Snowflake is cautiously building a way for end-users to make natural language queries of their data. “2023 is the year of AI,” Ramaswamy said. “First we have the ability to synthesize information in a fluid conversation through ChatGPT using Neeva.”

Snowflake is developing this vision in stages. First, search can be done through frequently asked questions. Next, the company is offering CoPilot to make it easier for people to write SQL code to provide faster access to the data. “We are building out the capability to query data in real time,” he concluded.

Like Freddie Mac, Snowflake is not going to offer Generative AI until it is safe. “We are building business applications and we want it to be rock solid with no hallucinations,” Slootman said.

He added, “AI is bridging the gap between man and machine. We are working on the last mile. We will not launch until security and governance are solid and we provide links to know where the data came from. We will have auditability and verifiability.”

Where Will Snowflake Stock Go?

If Generative AI works safely and effectively, more people will use Snowflake to access corporate data — which would increase the company’s revenue and presumably its stock price.

How much revenue will this add? “It is not there yet to quantify. It is bigger than a breadbox. It will become massive. It will pay for itself — for example in contact centers. It can run multiple workloads at the same time. A client told me, ‘People are getting drunk on Snowflake,’ ” Slootman concluded.

Goldman Sachs is bullish on Snowflake. According to my November 30 interview with Goldman Sachs managing director, Kash Rangan, “Snowflake is like a Ferrari — it is bigger, faster, and has more power. These days we are talking about analyzing so much more data — exabytes. Creating an architecture that runs in the cloud is essential for providing accurate analysis at scale.”

Snowflake creates significant business value for customers. “Snowflake can help you compare three suppliers and identify which one delivers on time and at the lowest price,” he told me.

Rangan added, “An investment bank can run daily analysis to find out which customer is the most profitable, which equity and fixed income trades made the most money. It is really hard to get those answers fast. If you have to wait a week, the information is not actionable.”

Goldman sees Generative AI as an opportunity for Snowflake in two areas: data and training large language models. Snowflake enables non technical users to ask a question in plain English to get access to all that data.

For example, Rangan said, “You can ask: ‘My supply chain is gnarled up. How can I configure it so I can deliver what customers ordered in three days rather than seven?’ ” He added, “Snowflake uses SQL. So before LLMs, only experts in SQL coding could tap into that valuable business data. Now anyone can access it.”

He thinks Snowflake has a bright future. “It has core technology, a great business model, an outstanding management team, and the ability to execute.”

Another analyst has a more mixed outlook. According to Morningstar — which set a price target of $231 for Snowflake — the analyst was disappointed with the company’s profitability; while its Q3 revenue and revenue forecast were better than anticipated.

Ultimately, Morningstar views Snowflake as well positioned to take advantage of the growth resulting from AI. However, the analyst is anticipating the investment required to satisfy the demand will cut into Snowflake’s profitability.

As long as Snowflake keeps reporting better than expected revenue growth, its stock price should rise.