Great post, Eric.
There’s been nearly 40 posts/replies on SNOW in the past several hours, so apologies if my own reply here clutters up the board.
SNOW’s Q4 result was a big, unexpected miss. There is no way around it. You can’t sugar coat that or hand wave it away. Previously, they always beat their guide by 6%+, this time was a 2.74% beat.
My first thought was “this quarter was a failure” when I saw the newswire flash on the screen. I saw the Q4 product revenue print and the full year FY23 guide of 67% growth, did not feel the need to read the rest of the press release, and I shot first/asked questions later. I immediately purged all shares of SNOW from all my accounts. My initial suspicion was this Q4 miss probably meant their entire business was decelerating way too fast and the durable hypergrowth story is no longer intact.
But, after reading through the results in its entirety and listening to the conference call an hour later, I changed my mind and re-entered.
Revenue growth slowed dramatically, yes.
But the hypergrowth DURABILITY story is still very much intact.
The miss does not seem to be from competitive pressure or product mis-step, but rather unexpectedly improved (“intended”) efficiency in their product combined with what management claims is a one-time unexpected slow resumption from seasonal holiday activity in January.
We should keep in mind these efficiency improvements are not for “philanthropy” reasons as Slootman said, it’s not for charity. I think it’s best to look past that management believes NRR to fall from 170% range in the near term, but instead focus on NRR that should stay above 150% for an even longer term.
The increase in efficiency is deliberate (although near term impact was unexpectedly powerful this Q and next Q). This isn’t a drop in consumption because of competitive pressures (as said on call) or customer churn. This is all part of their plan to stimulate increasing demand over time for more workloads to cross into SNOW at a faster pace. It’s a plan they have had since the beginning, they’ve been improving efficiency all this time - but it’s one quarter where there was an outsized near term efficiency improvement. This is very different than UPST with unexpected fraud attack in Q3. This is very different than DDOG with its COVID impact in 2020. This is a near term hit that is supposed to boost growth over time (either by increasing magnitude of growth in the future or maintaining its durability even longer).
As said on the call:
As a reminder, we have landed hundreds of customers to do these big on-prem Teradata migrations. I think we’ve only completed. We’re completely shut down a little over 30 of those is maybe in the mid-30s now. There’s piles of other workloads that they plan on moving. And when customers see the price performance, they will accelerate the movement of those other workloads to us…there is a lag and that depends on the customer. It could be a 1-month lag, it could be a 6-month lag before they realize that and move more workloads.
And as others have posted already, they have stated they see a gross impact of about $162 million for the year, but $65.5 million in revenue will probably be made up by increased workload migration. Presumably, in FY23 this efficiency improvement investment will have more than recouped the net expected impact loss in revenue (or, in my opinion, it’s more likely that Slootman et al are sandbagging this and they will beat handily in FY23).
Honest question here. What other companies currently doing >90% revenue growth today, do we expect to grow 50%+ in 5 years time? Off the top of my head, for example, MNDY is growing >90% (organically). (I sold my MNDY position after their earnings last month.)
In 5 years, I’m not confident that MNDY will be growing 50%+.
MNDY is already slowing down to (probably) 70%-range growth for 2022, down from 91% in 2021, while at 382M run-rate (308M TTM).
MNDY is in a fiercely competitive landscape with greenfield grass that is going to dry up, and offering a non-mission critical product without a consumption based business model. I hope they’ll do well moving forward but I’m skeptical of their hypergrowth durability.
SNOW on the other hand, did more total revenue this reported quarter than MNDY did in the last four quarters combined, and at a faster YoY growth rate of 101%! The numbers are saying something about the past and current narrative.
SNOW’s narrative looks like it is still (despite its impressive run-rate already) on the very early innings of a prolonged hypergrowth trajectory, fueled by the continued secular cloud tailwind, data explosion and its superior product over any current competitor.
I think SNOW can do 80% growth this FY23, at least, with over $2 billion in total revenue, while producing a great FCF margin. I wouldn’t be surprised if they are growing 50% in 5 years from now, at perhaps $13B run rate.
In my mind, SNOW is mimicking a path like that of the existing hyperscalers. AWS just grew 40% YoY at $70B run rate. This is the kind of growth durability that the market prizes heavily over time (and often, ahead of time).
I have SNOW at 360M shares (they have been diluting shares by only 1% year on year, completely contrary to the mis-information that someone posted earlier today) and am conservatively estimating forward P/S at 33 (at 80% growth this year) as of today’s after-hours close price. Obviously, the future is always very murky, but I think its valuation at that price is the same as DDOG on a one and two year forward basis.
We’ll have to see if what management said about today’s result miss as being true or not (the seasonal resumption slowing being one time hit, in particular). I’m choosing to believe them, of course. But I’m glad I managed to re-enter with a cheaper cost basis today.