What happened
Shares of data warehouse company Snowflake (SNOW 2.69%) fell 13.8% in March, according to data from S&P Global Market Intelligence. Although a 13.8% decline isn't pretty, Snowflake, which has revolutionized the way enterprises work with data, had been down much more following its fourth-quarter earnings report early in the month before recovering significantly.
Although Snowflake beat analyst expectations for revenue and losses per share, its guidance showed a bit more deceleration than some expected. However, management also offered a very good reason for lower growth expectations, which could be a long-term positive.
So what
In Q4, Snowflake grew product revenue by a whopping 102%, with losses per share of (0.43) also beating analyst expectations. But looking ahead, management projected just 79% to 81% revenue growth for the next quarter and an even lower 65% to 67% revenue growth for the upcoming full year.
It's difficult for a company to keep growing at such high rates as it gets bigger because it's more difficult to grow at high rates with a larger base. However, another factor is also playing into the lower growth expectations.
Towards the end of last quarter, Snowflake implemented an efficiency update to its platform, which allowed customers to accomplish more with less Snowflake consumption. Essentially, this acted as a price cut, which management puts between 10% and 20%, depending on the customer. Snowflake anticipates these new platform efficiencies will be a $160 million headwind to revenue growth this year.
However, management also expects that because of the price cut, customers will respond by using more of the product and will offset that gap by $60 million, for a net impact of around $100 million. That's about a 5% net effect since Snowflake's current revenue forecast is around $1.9 billion for the current year.
Image source: Getty Images.
Now what
After plunging 30% immediately after the results, it's perhaps no surprise that Snowflake bounced back and clawed its way to just a mid-teens decline for the quarter. As with many data-related companies, such as cloud infrastructure giants and memory chip producers, price cuts are the rule, not the exception. Since Snowflake is not a subscription-based revenue model but rather a consumption-based revenue model, it also has that quality.
Data companies regularly cut prices because, in general, the cost of computing and storage comes down to a per-bit basis over the long term, thanks to Moore's Law. Moore's Law states that chip and memory companies can typically double the number of transistors on a piece of silicon every 18 to 24 months, which leads to more efficiency.
Therefore, if I were a Snowflake investor, I wouldn't worry about the price cut and its near-term effect. Enterprises all over the world are working with data in ways they never have before, and Snowflake is becoming an integral platform for that transition. Price cuts and platform efficiencies are part of that journey.
One potential reason for Snowflake investors to be cautious today would be its valuation. It is posting some best-in-class growth right now, but shares are priced accordingly, at around 60 times trailing 12-month sales and around 40 times this year's sales guidance.
As interest rates rise this year and investors begin to use higher discount rates, it may be challenging for Snowflake to make it back to all-time highs over $400 per share anytime soon. That being said, Snowflake is a leader in the big data revolution and is still posting very impressive growth numbers. It's on my shopping list should shares fall further or if earnings catch up to their price in the medium-term.
