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Snowflake Continues to Heat Up

Many businesses today resort to cloud computing services to reap useful insights from massive volumes of data. Leading cloud computing giants like Microsoft (MSFT), Amazon (AMZN), and Alphabet’s Google (GOOGL) today allow their customers to use Snowflake (SNOW) software.

About two-fifths of Fortune 500 companies use Snowflake software today. Snowflake products help businesses to compile, analyze, view, and share data in bulk easily. Snowflake released its second-quarter results for fiscal year 2022 at the end of August. In this Q2 report, Snowflake showed an impressive ability to pole vault over analysts’ already elevated top- and bottom-line estimates.

Let’s take a close look at the company’s recent earnings to glean a better idea of the company’s financials. I am bullish on this stock.

Stunning Second Quarter Results

Snowflake reported massive 104% year-over-year revenue growth in the second quarter. Assisted by an over 100% jump in product revenue, Snowflake’s overall Q2 revenue stood at $272.2 million. Moreover, the company reported a loss of $0.64 per each share as opposed to the analysts’ forecast of a loss of $0.66 per share. 

The second-quarter report shows that the company’s remaining performance obligation stands at $1.5 billion. This signifies massive 122% year-over-year growth, which has been facilitated by net bookings in the technology and financial services segment. While revenue from healthcare products surged 200%, financial services product revenue jumped by over 100% year-over-year. 

Notably, Snowflake’s net revenue retention rate for the second quarter stood at a brilliant 169%. The net revenue retention rate signifies the number of existing customers that spend on volume-priced offerings. The company has managed to add 458 new customers this past quarter. This shows strong demand and momentum for Snowflake’s efficient cloud computing solutions. 

Moreover, Snowflake stated that its total number of customers surged to 4,990 from 3,117 last year. Interestingly, 116 customers out of those have spent more than $1 million in the company in the last 12 months. 

According to CEO Frank Slootman, Snowflake witnessed excellent triple-digit growth in terms of product revenue in Q2. 

Guidance for the Next Quarter

Snowflake management has also issued guidance for its fiscal third quarter. According to the management team, Snowflake will register product revenue of $280 million to $285 million in Q3. Moreover, the annual product revenue of the company will stand between $1.06 billion to $1.07 billion. 

However, analysts have predicted Q3 product revenue of $272 million and yearly product revenue of $1.02 billion. 

Interestingly, Snowflake shares fell 3% right after the release of Q2 results, due to such soft guidance provided by Snowflake’s management team. 

It appears the market might have been looking for a wider guidance upgrade. However, it’s worth noting that Snowflake has smashed its previous guidance targets, making these forward-looking estimates less relevant to long-term growth investors.

Competitive Threats to Snowflake

Advertising is one of the most profitable segments for Snowflake, and many of Snowflake’s customers fall into the advertising bucket. The company has decided to provide its support for the digital advertising standard named Unified ID 2.0. Snowflake is undertaking the said initiative as one of its major rivals, Google, is planning to use cookies for target advertising. 

The future performance of SNOW stock will also depend on how competition from Amazon Web Services (AWS) unfolds. In addition, competition from another player, Databricks, is also a matter of concern for Snowflake. 

Databricks has mopped up a massive $28 billion in a funding round held in February this year. The company aims to go for its initial public offering very soon. 

Wall Street’s Take

As per TipRanks analyst rating consensus, Snowflake stock is a Moderate Buy. Out of 21 analysts, there are 11 Buy recommendations and 10 Hold recommendations.

The average Snowflake price target is $311, implying a downside of 2.23%. Analyst price targets range from a high of $375 per share to a low of $240 per share.

Bottom Line

Snowflake focuses on 6 crucial markets, including healthcare, finance, advertising, and government clientele. The company is inching towards a yearly revenue run-rate of $1 billion. 

Indeed, Snowflake’s recent quarterly results are impressive. However, relatively soft guidance for the upcoming quarter has impacted investors’ enthusiasm. How the company actually performs relative to its competition will likely be the determining factor for investors intrigued by this hyper-growth stock in the cloud computing space.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.

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