Businesses are producing more data now than ever before. Some estimates say that 90% of all data ever produced has been made in the past two years alone -- and as more businesses shift to a cloud-based presence, this will likely increase.
With so much data, enterprises have to store their information in data warehouses to be analyzed in the future. The problem for those that store data across multiple locations like Amazon's (AMZN -1.65%) AWS or Microsoft's (MSFT -2.45%) Azure is that it is difficult to analyze that data together, which means businesses miss some critical insights.
Snowflake (SNOW -1.61%) serves as a one-stop shop where customers can store, analyze, and share data all on one platform. As a result, the company has seen tremendous success, including in its latest quarter. Despite a sinking stock price, three factors highlight how Snowflake is more appealing than ever right now.
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1. Products that continue to be loved
Snowflake reported revenue growth of 101% year-over-year to $384 million in its fiscal fourth quarter (ended January 31), driven largely by customers who spent 78% more this past quarter than they did a year ago. In Q4, Snowflake had over 5,940 customers, and 184 of them are now spending over $1 million annually on its services. Enterprises are obtaining more data, resulting in more frequent analysis, and Snowflake has been a major beneficiary.
This growth is expected to continue as well. The company's "remaining performance obligations" jumped 99% year-over-year in Q4 to $2.6 billion. In simpler terms, customers have agreed to spend $2.6 billion in the future on Snowflake's services, and the company expects over half of that will be spent within the next 12 months.
Snowflake Marketplace could become a large driver of new customer growth. It allows customers to share data they aren't currently using with other users, creating significant network effects. As businesses join Snowflake and make more data available for sale, the platform becomes even more valuable, which attracts more customers. As of October 2021, the company had over 800 data sets ready for analysis -- and with the network effects in place, this could grow exponentially in the future.
2. Profitability is coming quickly
As a result of its jaw-dropping growth, the company's profitability is improving rapidly too. In Q4, its net loss totaled $132 million, decreasing from $199 million in the year-ago quarter. Additionally, Snowflake has over $3.8 billion in cash and investments on the balance sheet, so this net loss won't be a concern for a long time.
The company generated $81 million in free cash flow this past fiscal year, which skyrocketed from negative $86 million a year earlier, and this trend should continue. The company's adjusted free cash flow represented 12% of revenue, and the company expects this margin to grow to 15% in the new fiscal year. These significant improvements will allow Snowflake to continue investing back into the business to make its products more valuable for its customers -- which it is doing right now.
3. Guidance was poor (for a good reason)
As part of its latest results, the company guided for revenue growth of just 66% in this current fiscal year. Considering that Snowflake just grew annual revenue 106% in the past year, this is weak guidance -- but it doesn't tell the whole story. Snowflake made enhancements to its platform, making it easier (and cheaper) for consumers to use its products. As a result, its customers can spend less for the same amount of usage, which will hurt Snowflake's top-line in the short term.
While this might be a drag in the coming year, this is a good thing for long-term investors. First, it shows how dedicated Snowflake is to its customers and their success. Second, it means that consumers will likely lean on the platform more over the long term. At cheaper prices, some customers will increase their usage marginally, resulting in more activity on the platform. This, in turn, will make them more dependent on Snowflake, resulting in higher revenue and usage over the long term.
However, many investors -- who do not have multi-year horizons -- sold the stock off. Now the company trades at a cheaper (but still expensive) valuation of 52 times sales. Considering that the business is still firing on all cylinders and the long-term future looks bright, investors may want to buy a small piece of this company. It might not be wise to go all-in because of its sky-high price-to-sales multiple, but your future self might thank you for owning a small piece of this stock and dollar-cost averaging in if the valuation keeps dropping.
