Snowflake (SNOW 0.61%) reported better-than-expected second-quarter of fiscal 2023 (ending June 30) earnings performance on Aug. 24, defying concerns about slower usage and longer sales cycles in the software infrastructure segment. Revenues were up by 83% year over year to $497.2 million, ahead of analysts' consensus estimate of $467 million. The company's remaining performance obligations (indicative of the strength of its contract pipeline and future revenue potential) grew 78% year over year to $2.7 billion.

These metrics seem quite exemplary for an early-stage tech company in a quarter when many prominent growth stocks have reported weak numbers due to surging inflation and softening consumer demand.

Snowflake's share price has soared by nearly 18% since its earnings release. Can this company prove to be a turnaround story?

Attractive financial performance

Snowflake's cloud-native data platform enables its clients to consolidate data across disparate sources (applications and locations) to form a single, unified view of data. Customers can then effectively query and analyze the data to derive meaningful business insights and build data-driven applications. The company's platform is also highly scalable and interoperable with a range of products from different technology partners.

Thanks to its superior technology, Snowflake has been consistently reporting attractive top-line growth rates for the past several quarters. The company has guided revenues of $1.905 billion to $1.915 billion for fiscal 2023, implying year-over-year growth of 67% to 68% -- an upward revision from its previous full-year revenue guidance of $1.885 billion to $1.9 billion.

The company has also revised its operating margin outlook from 1% to 2% for fiscal 2023. Snowflake is cash flow positive and has also adjusted its outlook upward for its fiscal 2023 adjusted free cash flow margin from 16% to 17%.

Snowflake has set an ambitious revenue and non-GAAP operating margin target of $10 billion and 20%, respectively, for fiscal 2029. With a coveted product offering and a rapidly growing loyal customer base, these targets seem quite achievable.

Robust customer acquisition metrics

In the second quarter, Snowflake reported a 36% year-over-year jump in total customer count to 6,808. In comparison, the number of customers bringing revenues over $1 million in the last 12 months rose year over year by 112% to 246. The company's Forbes Global 2000 customer count reached 510, up 15% on a year-over-year basis.

Besides rapid growth in large strategic customers, the company boasts a world-class net revenue retention rate of 171%. This implies that customers have been consistently increasing their spending on the company's platform.

Strength of consumption-based pricing model

Unlike many software infrastructure companies, which function either on a licensing or software-as-a-service (SAAS) model, Snowflake has adopted a consumption-based or usage-based pricing model. This means that the company charges its customers only for those database and computational resources used. Many clients prefer the latter in the current economic environment, as it gives them the flexibility to pay, which is not available in a subscription-based model.

Conclusion

Although Snowflake's recent quarterly performance has been quite stellar, it is too early to be confident about the company's continued success.

Snowflake is currently trading at 42 times last year's sales, far more than the U.S. market average of 2.3. The company is not yet profitable, which can result in increased share price volatility as investors opt for safe returns in recessionary times. Further, in the case of a recession, enterprises may opt to reduce their capital expenditure spending even on cloud solutions. This can adversely affect Snowflake's top line.

Despite these challenges, Snowflake remains a promising company targeting the cloud data market opportunity, which is estimated to be worth $248 billion by 2026. Considering its annual run rate of around $1.6 billion, there is still much runway ahead for the company. Hence, based on its improving financials and robust customer acquisition metrics, savvy investors can now consider taking up a small position in this stock.