Data platform and analytics company Snowflake (SNOW, Financial) has been ramping up its generative AI product offerings, leading to stronger-than-expected product revenue growth. In Q1, product revenue, which makes up the majority of Snowflake's total revenue, grew by 34% year-over-year to $789.6 million, surpassing its guidance of $745-$750 million. However, increased spending on GPU chips to support AI initiatives caused the company to miss EPS estimates.
- Recently appointed CEO Sridhar Ramaswamy, a former Google (GOOG, Financial) executive who founded AI-powered search engine Neeva, aims to advance Snowflake's AI capabilities and drive growth. He plans to continue investing in GPUs.
- Snowflake lowered its FY25 non-GAAP operating margin guidance to 3% from 6% and its adjusted free cash flow margin guidance to 26% from 29%. These lower margins are weighing on the stock, although the investments are crucial for driving revenue growth through new AI products like the Cortex large language model.
- Snowflake's high valuation is also impacting the stock's muted reaction. The stock is currently trading with a 1-year forward P/S of about 15.6x. Although Snowflake raised its FY25 product revenue guidance to $3.30 billion from $3.25 billion, the increase only covers the Q1 upside.
- The projected growth rate of 24%, compared to 22%, still represents a slowdown from the 33% growth achieved in FY24.
- During the earnings call, Snowflake mentioned that consumption growth moderated in April after a strong February and March, leading to a cautious FY25 guidance.
Overall, Snowflake's business remains healthy, reflected in its net revenue retention rate of 128% and the addition of fourteen customers spending over $1 million annually. The company now has 485 such customers. Snowflake is also seeing strong adoption of its Cortex AI features, with over 750 customers using these features as of last week.
