SNOW Q2FY22: GauchoRico's Take

SNOW (5.3% allocation; Q2FY22 25Aug earnings date)

There is anxiety and uncertainty among some of the investors whose opinions I respect. Some have held their shares, some have sold their entire position, and none added to their positions. What in the recent quarter’s results led to these reactions?

Let’s start with the bear case. I don’t think it’s really a bear case but more of a case of possible greener pastures elsewhere. The leading indicators for the strength of SNOW’s business and revenue are added customers and RPO (remaining performance obligations which is all committed revenue that’s not been recognized). Revenue from new customers typically lags meaningful contribution for 9-12 months after the contracts are signed. The case that those who sold their SNOW positions are making is that the past two quarters were weak in added RPO and new customers so revenue growth in 2022 is going to slow significantly. Some have said that they think revenue growth will slow from its current ~100% y/y growth rate to 80%. I do see a case for selling SNOW so don’t think that selling SNOW is the “wrong” move. However, I’ve decided to hang on to my position. My rationale for doing so is explained below.

*** Revenue growth in Q2 was 103% y/y: SNOW continues to be one of the fastest growing companies available.

*** Issued very strong guidance: Revenue growth guidance for Q3 came in a 92%. We can expect them to beat this (as usual) so they’ll likely come in around 100% y/y growth for Q3.

*** Strong DBNR continues: SNOW’s dollar-based net expansion rate was 169% for Q2. This backward-looking metric is going to stay above 160% for the remainder of FY2022 (according to management per the Q2 earnings call). Also, management expects DBNR to remain very high (130-140%) for a long time after FY2022.

*** RPO is only the minimum commitment by customers: Some investors have called out RPO being too low. However, customers often consume more from SNOW than is specified in the contract. As customers keep finding new use cases, I expect consumption to exceed customers’ commitments.

I bought the very highly valued SNOW shares because I strongly suspect that SNOW is building an essential business that’s also a flywheel (the more customers that use the SNOW platform, the more essential it becomes for existing customers and prospective customers, leading to an increased competitive advantage and an acceleration is adoption). For customers, it’s all about extracting value from their data. But now with data sharing that can be monetized and selectively shared on SNOW, data that belongs to others can also add value. Specifically, that value add is realized through cost saving and/or by the incremental addition of revenue. If computers can detect this value creation, then decision making of SNOW consumption can be handed over to computers bypassing the friction inherent in human decision making processes. Yes, I think that computers will be allowed to increase spending provided that that spending is net positive for the business. If and when that happens and people are removed from spending decisions, then I see a lot of friction to growth being eliminated. This is the high level reason why I’m invested in SNOW. Data sharing/data cloud is progressing nicely as was highlighted during the Q2 earnings call:

“…we have tremendous growth in the data listings that are coming onto the marketplace. And by the way, the reason that they’re coming is because they’re viewing Snowflake increasingly as a place where they can sell data. And the network effect starts to be induced, and more data begets more data, right, because it becomes a very rich environment after a while. So, we’re very positive with this quarter with the growth in listings, the growth in data, and so on. And that’s really how we track our progress in terms of the data cloud and the data networking relationships that make up that data cloud.”
–CEO Slootman during the Q&A session of the Q2FY22 earnings call

Now that sounds like continued great progress. As an investor, this is exactly what I want to see. One of the analysts on the earnings call asked about data sharing.

Here is that exchange:

Mark Murphy (analyst): “Frank, how many of your Fortune-500-type customers are in discussions with you today with some kind of a plan to build their own data cloud, for instance, an energy cloud, or an insurance cloud, or a retail cloud that uses Snowflake’s data-sharing model?”

Frank Slootman (CEO): “I can tell you that I’m involved in those conversations on a daily basis. You know, we lead with a value proposition literally in every conversation. We’re batting 1,000, you know, when we go down the data cloud path. So, we’re super excited by the way this is resonating with our future customers. Now, that said, the way our market has historically worked, you know, people have had a workload attitude and mentality to the world in terms of moving to the cloud. So, sometimes the data cloud is viewed as something that is sort of phase 2 or phase 3. People are first preoccupied with moving data to the cloud, then moving workloads to the cloud, and then having sort of pulling up, and having a look at what’s next. We’re working very hard to make sure that we look at the data cloud right from the beginning.

Batting 1.000!!! That’s a 100% customer conversion rate when they go down the data cloud path. This was the top reason I have SNOW in the portfolio, and there’s no way I’m selling out when there’s strong evidence of super strong traction with their data sharing/data cloud. SNOW is still in the process of building up the best data analytics solution in the world. They are working on maximizing the utility that data can have for customers while minimizing the friction in the process of turning data into actionable and profitable knowledge. Furthermore, SNOW is engineering their sales and marketing (and product customization) around about a dozen verticals. Each vertical has unique requirements so the customization around the product and the selling and marketing process will increase adoption within each vertical. This customization doesn’t happen overnight and is still in process, so I expect increasing success as SNOW rolls out more vertical-specific product features, marketing, and sales channel specialization.