Snowflake Is Growing Like Crazy. But at What Cost?

Snowflake Is Growing Like Crazy. But at What Cost?

Last year, one of the biggest concerns Snowflake (NYSE: SNOW) Investors became interested in how quickly its revenue growth rate was decelerating. But to the data cloud specialist’s credit, the company appeared to have this issue under control by the end of fiscal 2024. Indeed, Snowflake’s revenue growth rate actually accelerated in the first quarter of fiscal 2025 compared to the fourth quarter of fiscal 2024.

But that still doesn’t give the full picture. The revenue growth rate at which Snowflake has stabilized is incredibly high. THE technology company grew its first-quarter revenue 33% year over year, a percentage point faster than in the fourth quarter of fiscal 2024. Management even recently raised its revenue guidance for the entire 2025 financial year.

But there’s one glaring problem: Achieving these growth rates is going to be expensive.

Growth versus costs

After reporting strong revenue growth in the first quarter, Snowflake management said in its press release for the quarter that it now expects product revenue for the full fiscal year 2025 ( typically around 95% of total revenue) increased 24% year-over-year to $3.3 billion. . This is a slight increase from its previous forecast for product revenue in the period, which called for a 22% year-over-year increase.

However, management has lowered its margin expectations. Snowflake now expects a non-GAAP a full year (adjusted) gross profit margin of 75% (down from a previous target of 76%) and an adjusted operating margin of 3% (down from a target of 6%) previously). The company also expects its adjusted free cash flow as a percentage of sales to be lower. Its new forecast calls for a free cash flow margin of 26% compared to a previous estimate of 29%.

Michael Scarpelli, Snowflake’s chief financial officer, explained during the company’s first-quarter earnings call that the higher anticipated costs are due to increased graphics processing unit (GPU) costs related to software initiatives. artificial intelligence (AI) of the company.

“We operate in a rapidly evolving market and we view these investments as critical to unlocking additional revenue opportunities in the future,” Scarpelli said during the company’s first quarter earnings conference call.

Prioritize AI

It’s no surprise that the company is doubling down on AI. When Snowflake announced a CEO transition earlier this year, new CEO Sridhar Ramaswamy made it clear that AI would be a priority under his leadership.

“Generative AI is at the forefront of my conversations with my customers,” Ramaswamy said during the company’s fourth-quarter earnings conference call in February. “This is leading to a renewed interest in data strategy in preparation for these new technologies.” Ramaswamy later told investors that AI had created a “massive opportunity” for Snowflake. Achieving this will require “clear focus” and faster innovation, he stressed.

A demanding valuation

If Ramaswamy is right and AI truly represents a huge business opportunity for Snowflake, it’s possible that the company’s current investments will translate into greater revenues and, ultimately, greater profits as well. But will the profits be big enough and come soon enough to justify the stock’s valuation? Only time will tell. And therein lies the risk for investors buying the stock at its current price.

Stocking up on snowflakes is expensive. Its market capitalization as of this writing is around $49 billion, despite a cumulative net loss of $927 million over the past 12 months reported on sales of just over $3 billion.

Investors interested in Snowflake stock should keep in mind that massive growth and improved profits through continuous innovation are already priced into the stock at its current valuation. Even if the high costs of investing in AI end up being worth it, the stock may have already priced in its upside potential.

Given the stock’s sky-high valuation and the rising costs associated with investing in AI, it may be worth staying away for now. Revenue growth is strong, but investors should demand more from Snowflake given the stock’s current valuation.

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Daniel Sparks and its clients have no position in any of the stocks mentioned. The Motley Fool posts and recommends Snowflake. The Mad Motley has a disclosure policy.

The snowflake is growing like crazy. But at what cost ? was originally published by The Motley Fool

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