What happened
Shares of data company Snowflake (SNOW -2.48%) jumped 11.7% in May, according to data provided by S&P Global Market Intelligence. That easily beat the 0.25% return for the S&P 500 index. But the ride to this market-beating gain was anything but smooth.
So what
During the first few weeks of May, Snowflake stock went up by as much as 24%. It appears the company benefited from Wall Street's new favorite buzzword: artificial intelligence (AI). Indeed, Stifel analyst Brad Reback upgraded Snowflake stock to a buy rating early in the month, in part citing the rise of generative AI as a business tailwind, according to The Fly.
AI works by processing huge amounts of data. And Snowflake's platform is both a place to store data and use data, so the AI angle does make sense. Moreover, AI can potentially boost consumption of Snowflake's products. And the company uses a consumption-based business model, meaning it makes more money the more its software is used.
Beyond this, rumors started swirling that Snowflake was looking to acquire AI-powered search engine Neeva. Later in the month, Snowflake indeed acquired Neeva for an undisclosed amount, providing another AI reason for investors to cheer the stock higher.
However, Snowflake stock dropped all the way back down to where it started when it reported financial results for its fiscal first quarter of 2024 on May 24.
The biggest issue from Snowflake's Q1 report was its slowing growth rate. In Q1, its revenue was up 50% year over year, which was more than Wall Street expected. But management guided for 33% to 34% in the upcoming fiscal second quarter. And its guidance implies just a 28% to 29% growth rate in the second half of fiscal 2024.
First AI buzz caused Snowflake stock to soar. Then slowing growth brought the stock back down to earth. But apparently investors thought the sell-off was an opportunity, considering its strong rally to end May.
Now what
To be clear, Snowflake still appears focused on its core business -- it doesn't appear to be diversifying its business into internet search. According to various news outlets, Neeva has shut down its internet search platform. And Snowflake's official blog post says that it's putting Neeva's AI search innovations to work for Snowflake's data cloud platform.
There's a lot of excitement about AI right now, and rightly so. However, it remains to be seen whether AI can be a competitive advantage for a company like Snowflake or whether it will simply become table stakes -- something expected from customers.
Considering Snowflake's growth is cooling at a fast pace, shareholders certainly hope that Neeva can inject better growth back into the business. But it will probably take at least a couple of quarters before investors can start drawing any concrete conclusions in this regard.
