Disruptive data cloud provider Snowflake (SNOW -1.82%) has a lot to prove this week. The fast-growing tech company is scheduled to report its fiscal second-quarter results on Wednesday. Since its initial public offering in September 2020, the company has consistently posted staggeringly high year-over-year revenue growth rates.
Going into Snowflake's fiscal second-quarter update, however, many investors may be concerned that growth could decelerate materially. After all, while Snowflake's fiscal first-quarter top-line growth rate was high at 85%, it was far below the 101% growth rate the data cloud platform provider posted in the fourth quarter of the previous fiscal year.
What to expect
Investors can get an idea of what to expect from Snowflake management's product revenue guidance for fiscal Q2. While the company doesn't provide its consolidated top-line expectations, it does provide guidance for its product revenue -- which accounts for the bulk of the company's sales and generally trends closely in line with its growth rates for its total revenue.
Snowflake said it expects its product revenue to grow at a rate between 71% and 73% year over year, representing a significant deceleration from its 84% product revenue growth rate in fiscal Q1.
Notably, however, Snowflake CFO Mike Scarpelli did say in the company's fiscal first-quarter earnings call that the guidance baked in more caution than usual due to the global macro headwinds occurring in various industries. But it's always possible that the macro environment deteriorated even worse than management expected.
A deeper issue: mounting losses
Another important item for investors to check on during the quarter will be Snowflake's reported operating loss. In fiscal Q1, Snowflake's net loss was $166 million -- a significant sum for a company with just $422 million in revenue during the period. Importantly, however, the loss was an improvement from a loss of $203 million in the year-ago period.
Investors should look for Snowflake's quarterly net losses to continue narrowing as the company continues its journey toward profitability.
While losses are a concern, investors can take comfort in Snowflake's strong balance sheet. The company has over $5 billion of cash on its balance sheet and zero debt and generates positive free cash flow.
Whatever Snowflake reports this week, expectations are high. The company commands a towering market capitalization of about $49 billion, even as it continues to report losses. Investors in the growth stock are betting that strong growth and a scalable business model will help the company generate strong earnings over time. But continued rapid growth rates and narrowing losses are key to this thesis. If the company falters on either of these factors, confidence in the stock's sky-high valuation could wane.
Snowflake reports results for its second quarter of fiscal 2023 after market close on Wednesday, Aug. 24.
