Cloud company Snowflake delivered a fiscal Q4 2022 earnings beat that did not please investors. Despite more than doubling revenues YOY for the full year and quarter, Snowflake stock (SNOW) - Get Snowflake Inc. Class A Report cratered on the back of a timid outlook for fiscal 2023.
Today, Wall Street Memes reviews some of the highlights of Snowflake’s quarter. We then discuss whether SNOW deserves to be trading nearly 20% lower on Thursday.
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Snowflake’s Q4 results and outlook
As mentioned above, Q4 revenues of $384 million more than doubled. The company also reported very strong customer retention and a noticeable increase in large customers — those with significant budgets that can make more of a difference on Snowflake’s future revenues.
The backlog is also looking very healthy. Between Q4 of fiscal 2021 and Q1 of fiscal 2022, as pandemic fears and disruptions reached a peak, remaining performance obligations climbed by only $100 million. This time, the sequential increase was a much healthier $840 million.
Another highlight was the sky-high gross margin of 74% in fiscal 2022 that compares to 63% two years earlier. This is a feature of cloud and software business models that gain scale.
Adjusted free cash flow of $102 million in Q4 was about twice as large as FCF in the first three quarters of fiscal 2022 combined. This is another positive sign of maturing in the company’s financial performance.
But then, Snowflake hit investors with the bad news. From revenue growth of 106% in fiscal 2022, the company projects to deliver “only” 66% in fiscal 2023. Maybe worse, adjusted product gross profit is not guided to improve much, and neither are adjusted op income and FCF.
Is Snowflake in trouble?
To be clear, Snowflake’s business seems to be doing just fine, to say the least. The company has been able to capitalize on cloud momentum. The top-line execution has been impressive.
Even guidance, in my view, does not seem too worrying at first. Keep in mind that the outlook may very well have been conservative, considering that Snowflake has consistently topped expectations on quarterly revenues and earnings.
But investing is not all about buying quality execution and growth. It is primarily about doing so at a price that makes sense.
Prior to fiscal Q4 earnings, priced at around $265 per share, Snowflake stock traded at a mind boggling 2023 price-to-sales multiple of 40 times. To reiterate: I am talking P/S, not P/E. One would need to look at fiscal 2027 to find forward P/E of 60 times that could start to look reasonable — and barely so.
All of this is to say that SNOW has been priced very richly for very aggressive growth expectations. Once the growth story is put into question, it is not surprising to see the stock feel the pinch.
So, is SNOW stock a buy on this Thursday’s dip? It is hard to tell for sure. Momentum and sentiment has shifted, and it could take some time for shares to find their footing once again.
Those who choose to jump in today may need to check their risk aversion and tolerance for losses first, as the move could be speculative.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)