Market Update: Snowflake Drops 20%

Christian DeHaemer

Posted February 29, 2024

Snowflake Drops 20%.  Here is What to Do Now

Snowflake (SNOW) beat on both top and bottom lines and then got crushed.  In fact, they reported a great quarter.  

The Chairman, Frank Slootman said on the conference call:

FY ’24 product revenue grew 38% year-over-year to reach $2.67 billion. Non-GAAP product gross margin expanded to 77.8%. Non-GAAP adjusted free cash flow was $810 million, representing 56% year-over-year growth. We continue to pair high growth with efficiency. 

Those margins are huge. Almost 40% revenue growth is nothing to sneeze at either.  This is why I recommended you buy the company a few months ago.

Slootman went on to say:

Q4 was an exceptionally strong bookings quarter. We reported $5.2 billion of remaining performance obligations, representing accelerated year-on-year growth of 41%. Our international theaters outperformed the company as a whole. We continue to see success in our effort to campaign the largest enterprises globally. We added 14 Global 2000s in the quarter, and eight of our top 10 customers grew sequentially. Meanwhile, Snowflake has announced many new technologies that let customers mobilize AI, Streamlit in Snowflake, Snowpark ML Modeling API, and Cortex ML functions are all generally available. We also received FedRAMP High authorization on the AWS GovCloud. This enables Snowflake to protect some of the Federal Government’s most sensitive and classified data.

As you know, Snowflake is a big data company.  They turn data into usable information and apps for companies.  This is a hot commodity as AI is based on big data.   It is also why companies don’t want to give up their data to Microsoft or Google because it is proprietary and valuable.

So why did the stock faceplant?  For two reasons, the CEO, Frank Slootman, who has been at the helm for the last five years is moving on to become the chairman.

The stock market hates change and when a CEO, or a CFO leaves a company the immediate thought is that someone is cooking the books.  This reaction is usually wrong as it is in this case.  

Slootman likes to drive companies from startup to $2 billion and then move on.  He doesn’t like to run mature companies.  He has done what he set out to do with Snowflake.  Secondly, his replacement, Sridhar Ramaswamy, is good.  

Again from the conference call:

Prior to Neeva, Sridhar lead all of Google’s advertising products. During his 15-year tenure at Google, he helped grow AdWords and Google’s advertising business from $1.5 billion to over $100 billion. With the onslaught of generative AI, Snowflake needs a hard-driving technologist to navigate the challenges the new world represents. Sridhar’s vision for the future and his proven ability to execute at scale made it clear to us as a Board, he is the right executive at the right time to lead Snowflake.

Seems like a winner to me.  

The second reason for the selloff is that the company guided forward earnings growth downward.  

From today’s call:

Now, turning to FY ’25 guidance. For the first quarter, we expect product revenue between $745 million and $750 million, representing year-over-year growth between 26% and 27%. For the first quarter, we expect non-GAAP operating margin of 3%, and 366 million diluted weighted-average shares outstanding. For the full year, we expect product revenue of approximately $3.25 billion, representing 22% year-over-year growth. For the full year, we expect non-GAAP product gross margin of 76%.

This reads to me like the old Wall Street game of lower expectations so that the new CEO can beat them handily.  AI is booming right now and Snowflake is right in the center of it.  They are hiring 1,000 people and you’re telling me growth is going to slow from 38% to 27%? 

In other words, I like the stock and I will continue to hold it.  My instincts say that it’s a buy, but one of my rules is to never add to a losing position.  If you got it wrong once you could just make your mistake worse.   

My second rule is to plan your work and work your plan.  Nothing has changed with my investment thesis.  Continue to hold Snowflake (SNOW).

All the best,

Christian DeHaemer
Pro Trader Today