Is Snowflake Stock a Buy Now?

Shares of Snowflake (NYSE: SNOW) were in the doghouse following the release of the company’s fiscal 2024 fourth-quarter results (for the three months ended Jan. 31, 2024) on Feb. 28. They dropped 18% in a single session despite delivering better-than-expected numbers.

The reason behind Snowflake’s massive drop was the company’s poor guidance that missed Wall Street’s estimates by a big margin. And CEO Frank Slootman’s announcement that he has retired seems to have further weighed on Snowflake stock.

Let’s look at Snowflake’s performance and outlook, and check if its sharp pullback could be an opportunity for savvy investors to buy this cloud stock.

Snowflake’s quarterly results were well ahead of expectations, but the guidance was weak

Snowflake reported fiscal fourth-quarter revenue of $775 million, an increase of 32% from the prior-year period. The reading easily bested consensus estimates of $761 million.

Snowflake’s bottom-line growth was also solid, with its adjusted earnings rising an impressive 150% year over year to $0.35 per share, well ahead of the $0.18 Wall Street expected.

For the full year, Snowflake reported total revenue of $2.8 billion, a nice jump of 36% from the previous year. Even better, the adjusted net income for the full year nearly quadrupled to $0.98 per share from $0.25 in fiscal 2023. However, all the good work was undone when management revealed its guidance.

The company expects product revenue to increase 22% in fiscal 2025 to $3.25 billion. That points toward a big slowdown over the 38% growth in product revenue it recorded in fiscal 2024 to $2.67 billion. Analysts, meanwhile, were anticipating Snowflake to deliver a 30% increase in full-year product revenue to $3.4 billion.

But Snowflake, which provides a cloud-based solution that allows customers to consolidate data into a single platform and use that data to build applications or gain insights, adopted a cautious approach on its guidance. The company started fiscal 2024 amid challenging conditions. Slootman said on the latest earnings conference call:

The year began against an unsettled macroeconomic backdrop. We witnessed lackluster sentiment and customer hesitation due to lack of visibility in their businesses. Customers prefer to wait-and-see posture versus leaning into longer-term contract expansions. This reversed in the second half of the year and we started seeing larger multiyear commitments.

But Chief Financial Officer Mike Scarpelli added that even though consumption trends are improving, they have not returned to the patterns prior to fiscal 2024. As a result, the company has been cautious while issuing its forecast for the current year.

But this shouldn’t discourage savvy investors from buying the stock, since a closer look at other key metrics suggests that it could end up delivering stronger growth.

The drop looks like a buying opportunity

Though Snowflake’s fiscal 2025 revenue guidance was below analysts’ estimates, a look at the company’s remaining performance obligations (RPO) suggests that its long-term prospects remain intact. The metric, which refers to the total value of Snowflake’s future contracts that are yet to be fulfilled, shot up an impressive 41% year over year last quarter to $5.2 billion.

For some perspective, Snowflake’s RPO stayed well below $4 billion in the first three quarters of the fiscal year. This robust jump in RPO was driven by an improvement in the company’s customer base, as well as a spike in customer spending.

The company ended the quarter with 9,437 customers, an increase of 22% from the prior-year period. And the number of customers that generated over $1 million in product revenue for Snowflake increased 39% year over year to 461. The company also finished the quarter with a net revenue retention rate of 131%.

A reading of more than 100% in this metric, which compares the spending by a company’s customers in a quarter to the spending by that same customer group in the year-ago period, indicates that Snowflake’s customers increased their spending. This rise in spending also led to an improvement in Snowflake’s margin profile. The company exited fiscal 2024 with an adjusted gross margin of 78%, up from 75% in the previous year.

All this indicates that Snowflake’s slowdown is likely to be temporary. That’s why it could be a good idea for investors to capitalize on the pullback in this cloud stock as it seems built for robust long-term growth that could help it step on the gas once again.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.

Is Snowflake Stock a Buy Now? was originally published by The Motley Fool

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