What happened
Shares of data analytics platform Snowflake (SNOW 3.69%) dropped 11.7% in August, according to data provided by S&P Global Market Intelligence. During the month, investors were reminded of just how quickly the company's growth was decelerating, and that's a problem for a stock with sky-high expectations.
On Aug. 23, Snowflake reported financial results for its fiscal second quarter of 2024, showing year-over-year product revenue growth of 37%. This was a substantial drop from its growth rate of 70% in fiscal 2023. And it was much slower than its growth rate of 50% in the fiscal first quarter.
Moreover, Snowflake's management reiterated its guidance of $2.6 billion in full-year product revenue. The company already generated over $1.2 billion in product revenue in the first half of the fiscal year, implying $1.4 billion for the back half of the year. This guidance implies that the second half of fiscal 2024 will only grow 27% from the comparable period of fiscal 2023, further decelerating from results in Q2.
So what
On the one hand, give Snowflake's management credit for providing extremely long-term financial guidance. Since 2021, management has been calling for $10 billion in annual product revenue by fiscal 2029, which largely overlaps with calendar 2028.
On the other hand, Snowflake's ambitious goal has elevated investors' expectations to sky-high levels. In the not-so-distant past, Snowflake stock traded at an expensive price-to-sales (P/S) ratio of over 100 -- not uncommon for a small company but highly unusual for a large-cap stock like Snowflake.
SNOW PS Ratio data by YCharts
To put its fiscal 2029 revenue goal into perspective, Snowflake would need to grow at roughly 31% annually to hit $10 billion in time. As we've seen, the growth rate is already expected to fall below that threshold this year, which is part of what's bugging investors.
Also during August, investors got information on one of Snowflake's biggest competitors: the privately held company Databricks. But in seeking new funding, financial details came out. Databricks is reportedly generating over $1 billion in annualized revenue and growing at 70% year over year.
Considering Databricks' growth is better, it's possible Snowflake is losing to its competitor. The seeds of doubt have at least been sown in investors' minds.
Now what
Snowflake's business is doing better than one would think by looking at the stock's performance.
Cloud computing platforms have struggled in 2023. But Snowflake's Q2 results were strong. The company added 350 net new customers during the quarter, including 22 new customers from the Forbes Global 2000.
Moreover, spending from existing customers remains robust. This is tracked with Snowflake's net revenue retention rate of 142%, which is head and shoulders above most other software companies.
I doubt Snowflake is losing market share to competitors. Market expectations may have just been too high for the stock to outperform the market. But perhaps a lower valuation and the chance at better growth in the future will improve performance for shareholders.
