Snowflake’s growth story is worryingly typical
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Pranav Kiran
TORONTO, May 23 (Reuters Breakingviews) -Investors in data software firm Snowflake SNOW.N are partying like it’s 2021. The company’s revenue is growing, thanks to how it helps clients organize data to train artificial intelligence models. But the costs associated with getting that growth are high. Investors have been burned in the past by similar companies.
The $55 billion firm handily beat analyst estimates for its first quarter ended April 30, reported on Thursday, posting revenue of $829 million, up about 33% from the same period last year. Much of its sales comes from products that help clients organize their business data within one platform, which then makes it easy to build and improve customized AI models. Snowflake books contracts with clients including video gaming company Electronic Arts EA.O, and then can charge extra if they use the company’s products beyond what was previously agreed. Such rapid growth suggests momentum is working in Snowflake’s favor.
The company run by Sridhar Ramaswamy has an extraordinary retention rate, too, which beckons pricing power. The trouble is, at least for now, Snowflake is paying quite a lot for that top-line growth. Sales and marketing expenses eat up the lion’s share of revenue. It has a very large expense associated with stock-based compensation. Both attributes hurt companies like Uber Technologies UBER.N, which underperformed the S&P 500 for years since its initial public offering in May 2019.
Importantly, operating in a popular new segment for tech comes with a number of its own problems. To power Snowflake’s AI initiatives, it has to buy special chips from Nvidia NVDA.O. The $2 trillion semiconductor company, however, has some pretty rich clients. Snowflake is competing with Microsoft MSFT.O and Alphabet GOOGL.O for hardware, and as a result of that, Nvidia can also raise its prices. This is reflected in Snowflake’s research and development cost, which has gone up 48% in the past year.
Investors for now don’t seem to mind. Snowflake’s enterprise value to next 12-month sales multiple of 14 times, according to LSEG data, is more than twice the average stock on the BVP Nasdaq Emerging Cloud Index .EMCLOUD. The company could grow into its valuation as clients boost spending on their data and AI strategy. But in the meantime, investors have harkened back to how they were acting when rates were lower and cash for growth companies was more readily available. As with a few years ago, they are rewarding sales growth at any cost.
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CONTEXT NEWS
For the first quarter ended April 30, Snowflake posted a 33% rise in revenue to $829 million, beating expectations of $786 million, according to analyst estimates compiled by LSEG.
The company’s shares were up as much as 8% on May 22 after market close.
Snowflake has underperformed the market https://reut.rs/3wEqAbw
Editing by Lauren Silva Laughlin and Streisand Neto
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