Snowflake Earnings: Mixed News, But Signs of Stability

Key Morningstar Metrics for Snowflake

• Fair Value Estimate: $187.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Snowflake’s Earnings

Snowflake SNOW reported mixed earnings in its fiscal first quarter. Revenue growth was ahead of expectations, but updated full-year guidance showed expected margins again moving in the wrong direction. It was encouraging that management is now looking for 24% year-over-year growth in product revenue, slightly higher than the previous outlook of 22%. However, non-GAAP operating margins are now expected to be 3% for full-year results, compared with the previous outlook of 6% and actual results of 8% last year. With slightly higher growth but lower margins for the year roughly offsetting, we do not plan to change our long-term forecasts, and we maintain our fair value estimate of $187 per share.

After a rough previous quarter, we sense Snowflake is starting to find some stability. However, we will eventually need to see some better margin realization, and there is still some risk from decelerating revenue growth. This increases the downside risk if consumption and new workloads (hopefully driven by the company’s product launches) can’t make up for some of the other headwinds. We estimate revenue growth will likely decelerate to a mid-to-high-20% rate by the end of the year from over 30% recently. If that deceleration continues, there are risks to our fair value estimate.

We thought shares were mildly undervalued heading into earnings, and since they are up roughly 4% in after-hours trading, that puts them within 10% of our fair value estimate. We still think that maintaining decent growth in the mid-20s after the current year and seeing margins go in the right direction will be key for Snowflake as it builds off current results.