Snowflake rises on weak Q4 guidance, but analysts defend as margins increase
Snowflake (NYSE:SNOW) shares erased earlier losses and gained nearly 3% in early trading on Thursday after the data warehousing company reported third-quarter results and said product revenue for the next quarter would slow down, prompting several analysts to come to its defense.
Cowen analyst Derrick Wood who has an outperform rating on Snowflake (SNOW) but lowered the price target to $225 from $235, noted the guidance was "disappointing," but that strength in larger enterprises should provide some cover.
"While [fourth-quarter] guide was a bit disappointing & Snowflake is not immune to macro conditions, we were happy to hear of the strength in large enterprises, which is a more durable cohort and key to its [long-term] growth," Wood wrote in a note to clients.
"We were also encouraged that [fiscal 2024] guide assumes very little [deceleration] from [fourth-quarter] as it has high visibility into enterprise consumption trajectories, both from existing customers as well as the strong 28 new G2K customers signed in the [quarter] (avg ramp time is 6-9 months)," Wood added.
Wood also noted that free cash flow margins remain positive as they continue to rise and there is the potential for "upside" to long-term targets.
"Overall, our medium- & long-term thesis remains intact and [Snowflake] continues to carry one of the most powerful growth/margin frameworks in all of software," Wood explained.
For the period ending October 31, the Frank Slootman-led Snowflake (SNOW) said it generated $557M in revenue, up 67% year-over-year, including $522.8M in product revenue.
A consensus of analysts were expecting Snowflake (SNOW) to earn an adjusted 5 cents per share on $538.91M in revenue.
Looking ahead to the next quarter, Snowflake (SNOW) said it expects product revenue to be between $535M and $540M, a growth rate of 49% to 50% year-over-year, or well below the 67% the company saw in the third quarter.
Snowflake (SNOW) also said it expects adjusted operating margins to be 1% in the upcoming period.
Full-year revenue is forecast to be between $1.919B and $1.924B, compared to estimates of $1.92B. The company raised its expectations for adjusted operating margins for the full year, however, as it now expects the metric to be 3%, up from a prior view of 2%.
Piper Sandler analyst Brent Bracelin, who has an overweight rating on Snowflake (SNOW) and a $200 price target, noted the firm would be buyers on the weakness, citing the company's veteran leadership, under CEO Slootman, as well as its "differentiated" technology, free cash flow margins of 20% or more and its strong balance sheet, with $4.9B in cash.
"While having a 100% consumption-driven business model may pressure growth during periods of economic contraction, we consider recessionary headwinds to be a temporary drag on growth offset by new lands and expanding use cases over the long-run," Bracelin wrote in a note to clients.
Truist analyst Joel P. Fishbein, who has a buy rating and $200 price target on Snowflake (SNOW) shares, noted the firm is impressed by Snowflake's (SNOW) ability to scale even as free cash flow margins rise.
"Despite tough comps in [first-half of fiscal 2024] we believe the outlook could prove conservative based on management's historical strategy, and we continue to believe that despite macro headwinds, SNOW could become the fastest software company in history to $5B in revenue," Fishbein wrote in a note to clients.
The analyst also noted that Snwoflake (SNOW) said it expects an adjusted free cash flow margin of 23% in fiscal 2024, with this willingness to offer a preliminary guidance done to inspire "incremental confidence in the stability of the business at a time when the market has questions about the durability of the consumption model."
Last month, investment firm Bernstein started coverage on Snowflake (SNOW), noting that even though the company has seen strong growth, it may be difficult to take away business from the entrenched cloud competitors.