Snowflake & the Dreaded Full Year Guidance Game
As I published in my Portfolio Summary of 2021 (https://www.digitalporcupine.com/archives/929) just two short months ago, no one could have anticipated the relentless market (beta) turbulence that has continued to transpire. Increased inflation fears, rising interest rates leading to one of the largest sector rotations out of tech that I’ve seen in 30 years, an unlikely invasion of Ukraine by Russia, worldwide concerted sanctions, continued supply chain disruptions, to name a few, have all continued to “churn” even the most undeserving of great companies that I own. Ironically, the void of that all encompassing global pandemic we’ve all been living through for 3 years was barely contained before global challenges from every dark corder apparently sprung into action to fill it.
I typically espouse NOT paying too much attention to a company’s guidance and I instead focus on the “cold hard numbers” (to quote my good friend Ethan123) that the company actually puts up each quarter. There is a very real game that is played between the management of every public company and the analysts that follow them, in which every company is expected not to just meet the guidance they give themselves, but to also beat it by a certain amount. Analysts (and investors) then try to predict how much the company will beat their own number by, of course… which is all something of a self-fulfilling, interactive and iterative process over multiple individual quarters to get to the full year (annual) guidance that can baffle and befuddle even the cleverest when all said and done and result in more than a few confounded investors.
The current QUARTERLY earnings releases for most companies the past few weeks are for many companies also their FULL ANNUAL FISCAL year end releases for all of the last year combined (the past 4 quarters).
Typically on their year end earnings call, management will not just give their guidance for the next quarter (3 months away), but will also give annual guidance for the next entire year (comprised of the next 4 quarters). The problem of course is that the management knows that whatever guidance they give for the next quarter AND for the full year, they will have to subsequently beat it…and not just their own number, but they will also need to beat the higher number that the analysts project, the “whisper” number from those truly in the know, and the super, super secret, confidential, number that shall not be named, number, also. (Just kidding on the last one…at least so far!) Frankly, its become almost silly, though that is certainly the game that is played. And since the company is going to have to beat the numbers not just in Q1, but also in Q2, Q3 and Q4 in order to then beat the annual full year guidance number, they are often stuck (up front before the year has even started) giving ridiculously low initial annual guidance in order to later to insure than not only beat for each quarter, raise their estimates each quarter, but also then still have room to surprise everyone with yet a higher beat and raise quarter after quarter and annually.
A perfect example transpired with Snowflake (SNOW) giving guidance one year ago today that they would have growth this past year between 81-84% for the entire year (again, that was for this past year). In fact, each quarter since that prognostication they have not only significantly beat their quarterly guidance and increased the next quarter’s guidance, but they have quarter after quarter also been able to increase their total annual guidance number…in the end their sandbagged 81-84% annual revenue guidance ended up being an actual whopping 106% revenue growth when all was said and done (announced today on their Q4 earnings release).
And once again, today we started the vicious, self-fulfilling cycle all over again as SNOW announced their new full year guidance of a paltry (no doubt sandbagged) 65-67% revenue growth in 2023. Do you now understand why I give little credence to this number?) Needless to say, I don’t buy this guidance for a moment and suspect they could easily be in the 85-95% range next year…or more…but what I think doesn’t matter: Their guidance of 40% less growth next year vs. the 106% growth they just completed for 2022 is frowned at and abhorred by anyone looking at it today and was the cause for many to run for the hills today after hours as the stock price got buffeted and battered after hours by 30% at times as they tried to digest this information. Is is a worse company today than yesterday after putting up such monster growth numbers? I don’t think so. Sure, there are places to nitpick and I admit the quarterly sequential increase compared to last quarter might give some pause, but is still nothing at which to scoff too much for a company growing this fast…106% for the year! Wowza!
As I stated previously, I do not give excessive credence to annual guidance and especially when the company’s last 4 quarters revenue growth metrics have proven they are blowing that guidance out of the water handily and repeatedly: 110%, 103%, 110% & 101% quarterly revenue growth and ending with 106% total annual growth for 2022. The cold hard numbers tell a very different story from the coy guidance game that is played at the beginning of each year (really…you were only going to do 81%?!).
That said, I then parsed through the other actual KPIs for the company, listened to the call, quickly reviewed the financials, and tried to decipher and deduce the actual future performance of the company by looking at their other key “future” growth predictors and indicators to see how they might actually do going forward. Is the company falling apart? Are there red flags? Fraud? Losing market share? Sitting on their laurels? Proven slow down (not just sandbagged guidance)? Customers running away. Lower NRR?
No. No. No. No. No. No & No. Folks, you are free to disagree, but I feel SNOW is (still) a phenomenal company, growing faster than almost any other company out there at this size, with an amazing management team, expansive greenfield pastures to keep growing, a relatively strong moat, incredible growth and impressive FCF (and reaching their FCF goals much earlier than they guided). Are they expensive…dang right and should be! But this is definitely not a company that I feel deserves a 30% stock price haircut (after hours today). Yes, of course it is possible, and eventually a certainty, that a company this size will start to slow down from a blistering 106% growth shown this year, but its also possible and even probable that they can and will continue to surprise us over the next few quarters and years when I consider the exponential explosion of information, data analysis, sharing along with today’s extremely conservative guidance that deserves little credence. I see yet another great quarter and no detrimental impacts or landmines at this time to their business model. FCF, the largest bookings in Q4 of any quarter EVER (so much so that Slootman had to warn us on the call that FCF in Q1 would be huge), seven new $30m deals signed in the quarter, NRR of 178%, the purchase of Streamlit this quarter (1.5m new apps already build on SNOW’s platform), 99% growth in RPOs, the announcement of a KPMG partnership, additional $1.2b in bookings primarily from AWS partnership and Azure co-sellers, international expansion into India, Brazil, Asia & Europe as they go after the Global 2000 largest companies, the supreme confidence expressed by Frank Slootman on their earnings call and later on Cramer…and…and…and… I saw no reason to panic sell my reasonable investment in the company after hours today. I strive to invest long term with an eye towards holding for 1-5 years or more in great companies that are leading the digital transformation. That could change in a heartbeat, of course; however, SNOW has not released real, cold, hard numbers (other than conservative guidance they will surely beat) that scare me away from this long term investment and I hope to have the opportunity to buy this company at a significant discount tomorrow to increase my position.