Snowflake (SNOW -0.96%) continues to flip the narrative about the impact artificial intelligence (AI) will have on its business, turning in yet another strong earnings report. The stock is now up nearly 60% on the year, as of this writing. It was the second straight time the stock has surged following earnings this year.
Snowflake operates as a cloud-based data platform built around warehousing and analytics. Customers use its solutions to store and process massive data sets, with its architecture separating storage from compute and running seamlessly across multiple cloud providers. This flexibility makes it easy for users to share data securely and in real time.
There has been some worry that AI could pose a threat, given that Snowflake is strongest with structured data, while AI is built to make sense of unstructured data. However, that line of thought might not actually be the case, as it appears that AI may actually work best when working with clean, organized data.
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The company's Cortex AI platform, meanwhile, allows customers to build AI applications directly from their data within Snowflake's secure environment. It has been a hit with customers and has been helping to drive its strong growth.
Strong growth
After seeing 26% year-over-year revenue growth in the first quarter, Snowflake followed it up in Q2 with revenue surging 32% to $1.14 billion. That topped the $1.09 billion analyst consensus, as compiled by Visible Alpha. Product revenue also climbed 32% to $1.09 million. Adjusted earnings per share (EPS) increased to $0.35 from $0.18 a year ago, which easily bested the $0.27 consensus.
Its net revenue retention rate came in at 125% over the past 12 months, which was higher than the 124% it reported in Q1. Any number above 100% means that the company is seeing its existing customer usage expand after taking into account any customer churn. New AI products helped drive this growth.
Snowflake is also adding new customers. In the quarter, it brought on 533 net new customers, including 15 Global 2000 companies. It also continues to expand more into Europe and Asia-Pacific.
The company generated adjusted free cash flow of $67.8 million in the quarter. It expects strong free cash flow in the second half of the year. It ended the quarter with $4.6 billion in cash and investments and $2.3 billion in debt.
Looking ahead, Snowflake upped its forecast for full-year product revenue to approximately $4.395 billion, up from a prior outlook of $4.325 billion. The new guidance represents year-over-year growth of 27%. It's projecting adjusted operating margins of 9%.
For fiscal Q3, it guided for product revenue of between $1.125 billion to $1.13 billion, representing growth of between 25% to 26%. It's looking for adjusted operating margins of 9%.
Is it too late to buy the stock?
Following yet another great quarter, Snowflake should be ready to put the worries about the impact of AI on its business to rest. AI is not hurting it; in fact, its been a revenue growth driver. Meanwhile, the company continues to innovate through the addition of other AI products. This includes Snowflake Intelligence, where through natural language prompts, users can turn their structured and unstructured data into actionable insights or even help create AI agents.
The company is seeing both strong expansion within its existing customers, as well as adding new ones. As a software-as-a-service (SaaS) company with high gross margins and highly visible recurring revenue, this is a very attractive business.
Looking at valuation, the stock trades at a forward price-to-sales (P/S) multiple of nearly 18 times this fiscal year's analyst estimates. The company is showing strong growth, but that valuation is getting a bit hefty after its latest surge in price. As such, I would not chase the stock at these levels.
