Editor's note: An earlier version of this article contained an incorrect value for 50 million shares.
What happened
Shares of data storage and analytics company Snowflake (SNOW -0.26%) dropped on Thursday after the company reported financial results for the fourth quarter of its fiscal 2023. The company's growth is still very strong but slowing. And concerns over management's outlook for the coming year explain why Snowflake stock was down 14% as of 9:45 a.m. ET.
So what
This article is about why Snowflake stock is down but I'll briefly hit some positives from the company's Q4 results. Full-year revenue was up 69% compared to fiscal 2022. The company's adjusted free-cash-flow (FCF) margin was 25% in fiscal 2023 compared to an adjusted FCF margin of 12% in the previous year. And it ended Q4 with over 7,800 customers, adding over 500 in Q4 alone.
It's important to note that Snowflake's results exceeded guidance. However, management's tune is changing for fiscal 2024 (which starts now), saying recent trends have caused it to "reevaluate" its outlook, which is why the stock dropped today.
Now what
Right now, Snowflake's customers seem reluctant to sign deals and new customers aren't increasing their spending as fast as management expected. Therefore, Snowflake is guiding for fiscal 2024 product revenue of $2.7 billion, up 40% year over year. That's a meaningful slowdown from fiscal 2023.
Another thing to watch going forward, Snowflake's management expects to have a weighted average of 369 million diluted shares in fiscal 2024 compared to an average of 319 million in fiscal 2023. That's almost a 16% increase in shares in a single year due to stock-based compensation, which is enormous.
Considering Snowflake's management is guiding for an increase of about 50 million shares, that's worth roughly $6.7 billion at the current price per share. To somewhat counteract this, Snowflake's management is now authorized to repurchase $2 billion of its stock over the next two years. Therefore, it's planning to offset some of this dilution, but not all. For those wondering, it has the means to do so considering it has over $5 billion in cash, cash equivalents, and investments.
With a consumption-based operating model, Snowflake's results can naturally swing from quarter to quarter. And a single quarter doesn't establish a trend. Therefore, it's important for investors to put Q4 results in the broader context and watch results going forward to see if concerns over slowing customer spend are confirmed.
