What if you had a license to go after a multibillion-dollar market opportunity that was closed off to many of your biggest competitors? That’s exactly what cloud-based data company Snowflake (NYSE: SNOW) believes it has.
On Dec. 11, Snowflake announced it had achieved FedRAMP High Authorization from The Federal Risk and Authorization Management Program (FedRAMP). This government program provides a standardized approach to ensuring that cloud services are secure and low-risk for various agencies.
In an interview with Data Cloud Now, Snowflake Senior District Manager Enterprise Kevin Griffith said, “Companies that have achieved this certification, they view it as a hunting license,” to get new federal customers. He went on to say, “The companies that don’t have it, the perception is that the market is closed.”
What could this all mean for Snowflake investors?
The federal market opportunity
Snowflake’s announcement reminds me of a similar announcement from law enforcement technology company Axon Enterprise (NASDAQ: AXON). The company offers tasers and body cameras to officers. But it also has cloud-based software for managing data.
In December 2022, Axon announced that it had received the highest level of authorization from FedRAMP. And this has already made a difference in its business. For Axon, it believes serving federal customers is a $10 billion opportunity. And in the third quarter of 2023, five out of its top 10 deals were from federal customers. In fact, one of its new customers was the U.S. Department of Veterans Affairs.
Results from Axon demonstrate that FedRAMP authorization can quickly catalyze growth with federal customers.
In its press release, Snowflake didn’t disclose how big it believes its federal market opportunity to be. However, a report from Verified Market Research puts the cloud market for government agencies worldwide at over $80 billion by 2030. Other third-party reports point in the same general direction.
Circling back to Griffith, he says that federal customers should represent around 10% of Snowflake’s revenue. Looking ahead, the company is targeting $10 billion in product revenue by its fiscal 2029 (which mostly overlaps with calendar 2028). Therefore, federal customers could be a billion-dollar business for Snowflake over the long term.
Is this the boost Snowflake stock needs?
It’s impressive that Snowflake’s management has already issued guidance for its fiscal 2029. However, many investors bought Snowflake stock on the basis of those far-out target numbers. That’s risky because many unforeseen things can happen given that much time.
Snowflake is expected to report finalized fiscal 2024 results next month. But guidance implies about $2.7 billion in full-year product revenue. To achieve its fiscal 2029 goal, therefore, it needs to grow at a slightly better-than 30% compound annual growth rate (CAGR).
Snowflake has been a phenomenal growth stock since it went public in 2020. However, the chart below shows that its growth rate is plunging fast. And its guidance for the upcoming Q4 implies just 29% to 30% growth, which is already dipping below what it needs to hit its fiscal 2029 targets.
A lot of unforeseen bad things can happen given enough time. But that goes both ways. Unforeseen positive catalysts can also emerge. And perhaps that’s what Snowflake’s federal authorization will ultimately prove to be. By opening up a new customer demographic, it’s possible its growth rate will pick back up and propel it to its fiscal 2029 targets.
Snowflake investors will certainly hope that’s true. Growth within its existing customer base shows further signs of a slowdown, so making it up with a new market opportunity is important. The company’s existing customers do continue to increase their spending. But Snowflake’s remaining performance obligations of $3.7 billion were only up by 23% in 2023’s Q3.
Remaining performance obligations represent spending contracts and are a good way to predict future revenue. Granted, customers can always spend beyond what’s in their contracts, so this metric isn’t conclusive. But the slowing growth in remaining performance obligations suggest a further deceleration in revenue growth.
In any case, Snowflake’s shareholders will want to watch how growth with federal customers plays out in the coming year. Axon’s results show that good things can happen quickly. And it would certainly be a welcome boost to its growth rate if the same happened with Snowflake.
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Snowflake Just Got a “License” to Target an Entirely New Customer Base. Here’s What Investors Should Know was originally published by The Motley Fool