Snowflake’s EPS Disappoints: What’s Next?

Snowflake Inc. (NYSE: SNOW) operates as a cloud-based data warehousing company, generating revenue through a subscription-based business model. 

The Q1 FY25 earnings report highlights Snowflake's strong top-line growth, fueled by high demand for its AI-powered data solutions. Snowflake reported Q1 FY25 revenue of $829 million, exceeding expectations by $43 million. However, its EPS of $0.14 missed Wall Street's expectations by $0.03.

A crucial metric for Snowflake is product revenue, which increased by 34% to $790 million. The company now has 485 customers with trailing 12-month product revenue exceeding $1 million, a 30% rise from the previous year. Additionally, Snowflake serves 709 Forbes Global 2000 customers, an 8% year-over-year growth, showcasing its expanding market presence. The stock experienced significant volatility in the aftermath of the earnings release, trading  4% higher pre-market but selling off aggressively at the open after price target revisions. 

Snowflake achieved a net revenue retention rate of 128%, reflecting strong upsell potential, alongside a 40% year-over-year growth in free cash flow. Remaining Performance Obligations stood at $5.0 billion, a 46% increase from the previous year, indicating a healthy future revenue pipeline. The company also cited strong customer interest in its newly available AI products as a key performance driver.

The primary driver of Snowflake's Q1 results was higher-than-expected product revenue growth. The company reported a GAAP product gross profit of $570 million and a non-GAAP product gross profit of $607 million, resulting in a non-GAAP product gross margin of 77%. Due to the strong Q1 performance, Snowflake increased its full-year product revenue guidance to approximately $3.3 billion, representing a 24% year-over-year growth. For Q2, product revenue is expected to be between $805 million and $810 million.

It's not all smooth sailing, however. 

In a competitive landscape where major players like Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL) significantly exceeded earnings expectations in the past few weeks, not to mention NVIDIA (NASDAQ: NVDA), Snowflake's lackluster EPS does not bode well.

Snowflake Analysts Mixed 

Analysts had mixed reactions to Snowflake's earnings report. JP Morgan Chase & Co. (NYSE: JPM) boosted its price target from $170 to $185, maintaining an Overweight rating. Conversely, Stifel lowered its price target to $200 from $220, and Needham & Company adjusted its price target from $240 to $210, though both maintained Buy ratings. These varied reactions reflect some doubt (or at least division) about analysts' expectations.

Looking ahead, GPU-related costs associated with AI initiatives are a 'clear and present' concern to management. Rising GPU prices significantly impact Snowflake's bottom line by increasing operational costs for AI and machine learning workloads, squeezing profit margins and raising infrastructure costs. NVIDIA's recent strong earnings underscore the growing demand for GPUs, driven by advancements in AI and expanding data center needs. This sustained demand suggests Snowflake will face continued upward pressure on costs, acting essentially as an AI 'price-taker'.

There's no question about the fact that Snowflake has the cloud winds at its back: the adoption of hybrid and multi-cloud strategies is expanding as businesses seek flexibility and cost efficiency. According to Gartner, around 81% of organizations work with two or more cloud providers, a trend expected to grow. However, Snowflake’s struggle with profitless growth, coupled with fierce competition from tech giants encroaching on its core business, should give investors pause. 

The article "Snowflake’s EPS Disappoints: What’s Next?" first appeared on MarketBeat.