Snowflake Falls as a Software Tweak Hits Revenue. Analysts Remain Bullish.

Snowflake shares are taking it on the chin after the cloud-based data-software company posted complicated quarterly results that left investors a little disappointed. Keep in mind that Snowflake is one of the fastest-growing publicly traded software stocks, with a valuation to match, so even as hint of negativity can spur volatility.

The stock fell as much as 25% in after-hours trading on Wednesday. It was off 16%, at $221.45, on Thursday.

For the quarter ended in January, Snowflake (ticker: SNOW) posted revenue of $383.8 million, up 101%, and ahead of the Wall Street consensus forecast of $372.6 million. Product revenue in the quarter was $359.6 million, up 102%, and ahead of the range of $345 million to $350 million management had told investors to expect. Snowflake doesn’t provide guidance for its overall revenue.

But analysts noted Thursday that the margin by which the company beat expectations was narrower than in the previous quarter, showing a slight deceleration from 104% growth in the October quarter.

A primary issue for the stock is tied to the company’s consumption-based business model. Snowflake’s customers pay for the computing time they use, no more, no less. And CEO Frank Slootman explained in an interview that the company made a tweak to its software in January that allows customers to do the same work with less resources.

The adjustment cost the company about $2 million in just three weeks in January, and the shift will continue to be a factor in the months ahead, contributing to fiscal 2023 guidance that fell shy of Street estimates. The company estimates the net top-line impact for the current year at about $97 million, but Slootman sees a long-term net positive. 

“This isn’t philanthropy,” he said. “When you make something cheaper, people buy more of it.” In this case, that applies to computing time. 

Morgan Stanley analyst Keith Weiss said in a research note that Snowflake is banking on a theory called Jevons’ Paradox, named for the 19th century English economist William Stanley Jevons. The idea is that as technological progress increases the efficiency with which a resource is used, the rate of consumption rises due to increasing demand.

Weiss noted that the company thinks the change will reduce its fiscal 2023 growth rate by about 8 percentage points, but said the long-term consequences will be positive. He repeated his Overweight rating on the shares.

“By improving price performance for the end customer, Snowflake takes a hit on near-term monetization, but should yield a higher volume of workloads moving to the platform and more durable growth longer-term,” he said. “We would take advantage of the dislocation to build positions in this core software franchise.” 

Another factor that may be contributing to the weakness in the stock is the company’s announcement that it has agreed to acquire Streamlit, a San Francisco company that provides software to make it easier to create data visualization applications on top of the Snowflake platform. Slootman said the company is paying $800 million—80% in stock, and the rest in cash. The deal won’t add any significant revenue, but will add about $25 million this year in operating expenses, costs already reflected in guidance.

The debate about Snowflake shares on Wall Street hasn’t changed. The stock is one of the world’s fastest-growing public companies, and one of the most expensive on a price-to-sales basis.

For the full year, Snowflake is projecting product revenue of $1.88 billion to $1.90 billion, up 65% to 67%. Total revenue will be a little higher than that. Assuming it could be $2 billion, the stock is trading at about 34 times forward sales. But it is also true that the stock previously has traded at an even richer valuation: The stock is down about 45% since the Nasdaq Composite peaked in November.

Quite a few analysts brought down their target prices on the stock on Thursday, but most remain steadfastly bullish.

Truist analyst Joel Fishbein reiterated his Buy rating and $400 target price. “We are buyers on the pullback as we see the pass-through benefits [of the product adjustments] as a continuation of the strategy that made Snowflake a market leader,” he said in a research note. “Given the implied valuation, we view shares as attractive on a growth-adjusted basis.”

Mizuho analyst Gregg Moskovitz made a similar call, repeating his Buy rating, while trimming his target price to $370, from $410. He is in agreement that the platform adjustment will initially lower consumption, but over time “will very likely become a net positive by stimulating more workload growth.” He raised his forecast for fiscal 2024 revenue to $3.2 billion, from $3 billion, in part because of the boost to growth he expects as the platform change reduces costs for customers.

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