What Happened?
Shares of data warehouse-as-a-service Snowflake (NYSE:SNOW) jumped 32.4% in the morning session after the company reported a strong "beat and raise" quarter. It was encouraging to see Snowflake exceed analysts' revenue expectations this quarter (fiscal Q3'2025) with a net revenue retention rate (NRR) that didn't fall at all from last quarter.
During the earnings call, Snowflake emphasized its commitment to simplifying data workflows and integrating AI capabilities, such as Snowflake Cortex. These initiatives are driving competitive displacement and increasing customer adoption. Additionally, new products like Snowpark are contributing to revenue growth. Snowpark is expected to account for roughly 3% of total product revenue.
On the AI front, Snowflake reported over 1,000 generative AI use cases deployed in production, and 3,200 customers utilizing its platform for AI and machine learning applications. This is another aspect of the business with a strong potential to accelerate growth as customers recognize the value that AI adds to their operations.
Moving to the bottom line, operating margin in the quarter beat, and combined with the top-line improvements and cost efficiencies, EPS easily surpassed analysts' estimates.
Looking ahead, Q4 product revenue guidance was ahead of analysts' expectations, adding to the good news. For the full year, guidance for product revenue, gross margin, and operating margin were all raised.
Overall, this was a very good quarter, a relief for a company that has shown some uneven earnings performance in the last year.
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What The Market Is Telling Us
Snowflake’s shares are somewhat volatile and have had 12 moves greater than 5% over the last year. But moves this big are rare even for Snowflake and indicate this news significantly impacted the market’s perception of the business.
The biggest move we wrote about over the last year was 9 months ago when the stock dropped 24.9% on the news that the company reported weak fourth-quarter results and provided product guidance for Q1, which missed analysts' estimates. In addition, net revenue retention continued to decline. Snowflake attributed some of the challenges to significant holiday impacts in December and January, a recurring challenge for predicting consumption patterns. Consequently, understanding consumption trends proved difficult, with trends yet to revert to pre-FY'24 levels. As a result, these concerns were baked into the product growth guidance, with management expecting "increased revenue headwinds associated with product efficiency gains, tiered storage pricing, and the expectation that some of our customers will leverage Iceberg Tables for their storage."
Another significant negative that added to the stock's weakness was the announcement of CEO Frank Slootman's retirement. Slootman is a highly-respected tech executive who guided Snowflake through its public offering. Before that, he was CEO of ServiceNow (NYSE:NOW), a company he also shepherded through the IPO process.
On the other hand, Snowflake delivered strong free cash flow while still growing revenue at 30%+, which is certainly an impressive feat.
Snowflake is down 9.1% since the beginning of the year, and at $172.09 per share, it is trading 27.1% below its 52-week high of $236 from February 2024. Investors who bought $1,000 worth of Snowflake’s shares at the IPO in September 2020 would now be looking at an investment worth $677.35.
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