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Why Snowflake Stock Dropped -- Then Popped -- After Earnings

By Rich Smith - Updated May 28, 2021 at 9:19AM

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Snowflake crushed on sales growth in the first quarter, but missed badly on earnings.

What happened

Shares of cloud computing software company Snowflake (SNOW -4.83%) tumbled more than 6% early this morning, after reporting earnings last night -- and just a couple weeks after analysts at Rosenblatt Securities had given the all-clear and predicted a strong first quarter for Snowflake.

As of 2:30 p.m. EDT, however, the stock has turned around and is now up 3.3%.

Heading into the fiscal first quarter of 2022 (that's right, Snowflake's financial calendar is a year ahead), analysts were looking for Snowflake to report sales of $212.9 million, and lose only $0.16 per share on those sales. Rosenblatt thought those expectations conservative, and therefore upgraded the stock in expectation of a sales beat. As it turned out, the analyst was right about that.  

Snowflake reported $228.9 million in Q1 sales.

Bear and bull face off under green and red stock arrows

Image source: Getty Images.

So what

That's the good news. The bad news is that despite beating on sales, Snowflake appears to have missed -- badly -- on earnings, reporting a per-share loss of $0.70 per share.

So on the one hand, Snowflake had a great quarter for growth. Product revenue alone (the bulk of Snowflake's business) grew 110% year over year. So, too, did total revenue -- up 110%. And CEO Frank Slootman hailed this triple-digit growth as "reflecting strength in customer consumption."

At the same time, however, Snowflake scored an operating profit margin of negative 90% on those sales, according to generally accepted accounting principles (GAAP) -- not good.

Now what

Will it get better? In one sense, maybe yes. In another sense, though -- probably not. Forecasting results for the fiscal second quarter of 2022, Snowflake says its product revenue will continue to grow strongly, up 88% to 92% to a range from $235 million to $240 million. However, management says that its pro forma operating profit margin on those sales will be negative 19%.

Management didn't give a GAAP estimate for operating margin, but seeing as its pro forma margin in Q1 was negative 16%, this suggests that margins are weakening, not strengthening, even as Snowflake's revenue grows.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Snowflake Inc. The Motley Fool has a disclosure policy.

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