Snowflake’s Customers’ Caution Seeps Into Outlook

No-moat Snowflake SNOW had a mixed quarter, beating our top-line estimates slightly while coming in under our earnings per share forecast. Guidance for the year was conservative, as Snowflake stressed its customers’ cautious spending trends at this time. As a result, we are lowering our fair value estimate for Snowflake to $258 from $295 per share. While we have baked in less growth in the near term based on the macroenvironment, we are still convinced Snowflake boasts incredible opportunity to come, with particular upside from its data marketplace—which only accounts for a small portion of revenue at the moment. We continue to believe Snowflake stock is attractively priced for the long-term investor who is looking to get high-quality exposure to the nascent and booming data lake and data warehouse space, which we believe is moaty by nature. Altogether, we think the market is too heavily discounting the early mover advantage Snowflake has, which implies a snowball effect to market size, in our view.

Snowflake reported fourth-quarter revenue of $589 million, an increase of 53% year over year. Product sales powered the growth, bringing in revenue of $555 million, an increase of 54% year over year. Snowflake reported non-GAAP earnings per share of $0.14, a 4-cent improvement from the prior year period. Despite revenue outperformance, bookings in the quarter underperformed, largely due to its international market. However, we think that the underperformance is not too alarming—as it’s largely reflective of smaller, bridging deals to get by in the near term. We believe these will likely flux to heftier deals once we enter a more normalized period.

Snowflake’s net retention rate fell to 158% from 178% a year ago, however, we still continue to think this to be well above the industry average—with the possibility of increasing later on, given the greater volatility that comes with Snowflake’s consumption model.