Data analysis platform provider Snowflake (SNOW, Financial) surpassed Q2 EPS and revenue expectations and increased its share repurchase authorization by $2.5 billion. However, the stock is experiencing a sharp sell-off due to underwhelming guidance, especially given its high valuation with a 1-year forward P/S ratio of about 10.5x.
- For Q3, SNOW guided for product revenue of $850-$855 million, slightly ahead of expectations at the midpoint. The midpoint translates to year-over-year growth of 22%, a notable decline from Q2's 30% growth.
- SNOW raised its FY25 product revenue guidance by $56 million to $3.356 billion. However, this increase did not impress investors, especially since Q2 product revenue exceeded estimates by about $20 million. Additionally, SNOW reaffirmed its non-GAAP operating margin guidance of 3%, despite achieving a 5% non-GAAP operating margin in Q2.
- Slowing growth and a high valuation are concerning, and rising expenses compound the issue. SNOW is ramping up GPU-related investments to support new products like Cortex and Snowpark. In Q2, R&D costs surged by 39% to $437.7 million, impacting margins and non-GAAP EPS, which fell by 18% year-over-year to $0.18.
- On a positive note, SNOW is optimistic about its new AI products. Cortex Search and Cortex Analyst are expected to be available in Q3, and Snowpark is already contributing to revenue. Snowpark allows customers to use programming languages like Python, Java, and Scala within SNOW's cloud platform, enhancing the deployment of AI and machine learning models. SNOW's FY25 product revenue guidance includes approximately $100 million from Snowpark.
Overall, SNOW's business remains healthy, with a net revenue retention rate of 127% as of July 31, 2024, and a 48% year-over-year increase in remaining performance obligations. However, the stock's high valuation is difficult to justify amid slowing product revenue growth and declining operating margins.
