Earlier this year, artificial intelligence (AI) and big data analytics company Palantir revealed a creative customer acquisition strategy. Namely, Palantir is hosting immersive bootcamps during which prospective customers can use and test the company's suite of software products. The goal of these bootcamps is to help customers identify use cases for artificial intelligence (AI) as the technology becomes more of a focal point in IT budgets.
One company that is closely affiliated with Palantir is data storage platform Snowflake (SNOW 5.87%). After reporting a mixed third-quarter earnings report, Snowflake just announced that it has some tricks up its sleeve in an effort to curb Wall Street's concerns. Let's dig into what Snowflake is doing, and more importantly why the company is acting now.
NYSE: SNOW
Key Data Points
How is Snowflake copying Palantir?
Just this week Snowflake posted on X (formerly Twitter) that the company will be hosting its own bootcamps. These workshops are geared toward enterprises that are analyzing how large language models (LLMs) can be integrated into operations. But more importantly, the company is teaching these prospective clients how generative AI can be used on Snowflake's own platform. Just like with Palantir, these bootcamps are meant to serve as a source of lead generation -- and they couldn't be coming at a more important time.
Image Source: Getty Images
How can these bootcamps help Snowflake?
Snowflake is a software-as-a-service (SaaS) business. SaaS companies tend to be scrutinized by investors on metrics that go beyond the traditional financial statements. One important figure for SaaS companies is net retention, which measures how much revenue the company retains net of any churn it experiences. If this ratio is above 100%, this implies that the business is retaining and expanding revenue at a quicker rate than churn. The table below illustrates Snowflake's net retention over the past year:
| Figure | Q3 FY23 | Q4 FY23 | Q1 FY24 | Q2 FY24 | Q3 FY24 |
|---|---|---|---|---|---|
| Net Revenue Retention | 166% | 158% | 151% | 142% | 135% |
Data Source: Snowflake Q3 Fiscal 2024 Investor Presentation
The trend here is easy to spot. Snowflake's net revenue retention (NRR) has declined for five consecutive quarters. To make matters more concerning, investors should take a peak at the company's revenue growth rates as well:
| Figure | Q3 FY23 | Q4 FY23 | Q1 FY24 | Q2 FY24 | Q3 FY24 |
|---|---|---|---|---|---|
| Total Revenue Growth Rate | 67% | 53% | 48% | 36% | 32% |
Data Source: Snowflake Q3 Fiscal 2024 Investor Presentation
The combination of revenue decelerating and NRR shrinking doesn't exactly instill confidence. But with that said, I don't think it's time to panic just yet. Keep in mind that macroeconomic factors such as high inflation and interest rates have impacted businesses of all sizes. Even large enterprises, which are Snowflake's target customers, have taken a step back to assess operating budgets. As a result, many corporations have gotten leaner by reducing expenses.
Furthermore, the sales cycle for new products and services has gotten longer as decision makers are operating with fewer dollars to spend. Enterprise software has not been immune to this dynamic.
This is why I think these bootcamps are more important than ever. During Palantir's Q3 earnings call, management explained that it hosted more than 140 bootcamps just in November. And interestingly, these workshops were for both new and existing customers. Given Palantir's latest financial report, it's clear that the bootcamps are not only creating demand but spurring faster customer adoption, as evidenced by the company's client growth.
It's obvious that Snowflake has seen the tailwinds Palantir's hands-on approach with customers has generated, and is now looking to mimic the strategy.
Is Snowflake stock a buy?
SNOW PS Ratio data by YCharts
The chart above illustrates Snowflake's price-to-sales (P/S) ratio benchmarked against a cohort of other enterprise SaaS names. Snowflake's P/S multiple of 23 is not only the highest among these names, but it's significantly higher than that of the next closet competitor, Datadog. Considering the pace at which Snowflake's revenue is decelerating coupled with its falling NRR, it's hard to justify such a premium.
SNOW Free Cash Flow (Quarterly) data by YCharts
One thing that does look encouraging is Snowflake's free cash flow. While it's volatile, it has been consistently positive for several quarters. This could imply that the company is exercising disciplined cost measures despite a slowdown in business and a tough economic environment. Moreover, by generating strong cash flow, Snowflake is able to invest back in the business -- precisely what it is doing with these bootcamps.
While the jury is still out on whether Snowflake's bootcamps will result in similar demand to that of Palantir, I'd say it's worth a try. These workshops could help speed up the sales process, which in theory would result in accelerated customer acquisition and revenue growth. By capturing customers earlier in their digital transformation journey, Snowflake has the opportunity to expand these client relationships over time and strengthen its NRR profile. Should revenue return to more robust growth rates, it's likely that operating margins will expand and cash flow will increase.
While Snowflake stock doesn't look cheap, owning shares in the company could be viewed like a long-term call option on the themes of big data and artificial intelligence (AI). If you're bullish on the prospects of AI, then a position in Snowflake could be worth a look.
