Snowflake shares tank after first earnings release as a listed company

Snowflake (SNOW) shares were trading sharply lower in US premarket trading today after it reported its first quarterly earnings as a listed company.

The company’s IPO was the biggest of 2020, and even Berkshire Hathaway whose chairman Warren Buffett hasn’t been a fan of tech companies or IPOs, co-invested in the IPO along with Salesforce.

Snowflake reports earnings

Snowflake reported its fiscal third-quarter 2021 earnings yesterday after the markets closed. Product revenues came in at $148.5 million in the quarter—a year over year increase of 115%. Its total revenues rose 119% over the period to $159.6 million. Snowflake’s revenue growth moderated slightly from the previous quarter, when it had reported a 121% growth.

Key takeaways from Snowflake’s earnings

Snowflake’s RPO (Remaining Performance Obligations) increased 240% year over year in the quarter to $927.9 million. RPO is a key metric that Snowflake reports and it represents the contracted future revenues. It includes non-cancelable contracted sales and deferred revenues. These revenues will be recognised in future periods, however the timing of that is uncertain.

Snowflake reported 3,554 total customers in the quarter and 65 of these had product revenues of more than $1 million in the trailing 12 months. In the corresponding quarter last year, it had 31 customers with a trailing 12-month revenue of above $1 million. The company had a net revenue retention rate of 162% in the quarter.

It now has eight of the Fortune 10 companies as customers. Also, in the fiscal third quarter, it added 12 news Fortune 500 companies to its client list. These include Fiserv and Berkshire Hathaway’s insurance subsidiary GEICO.

Strong growth amid the COVID-19 pandemic

“We are pleased with our performance this first quarter as a public company,” said Snowflake’s CEO, Frank Slootman. He added, “The period was marked by continued strong revenue growth coupled with improving unit economics, cash flow, and operating efficiencies. Our vision of the Snowflake Data Cloud mobilizing the world’s data is clearly resonating across our customer base.”

Snowflake’s losses narrow

Snowflake registered an operating loss of $169.5 million in the quarter. It reported a per-share loss of $1.01 as compared to a loss per share of $1.92 in the corresponding quarter last year. While Snowflake’s topline was better than expected, it reported a wider than expected loss in the quarter. Analysts were expecting the company to report a loss of 75 cents per share. Furthermore, its gross margins contracted from 59.6% to 58.2% over the period and negative operating cash flows of $19.2 million.

However, thanks to its IPO, it had cash and cash equivalents of $5.1 billion at the end of the quarter. The cash will help it invest in growth as well as bridge the cash burn before it starts to generate sustainable positive free cash flows.

Snowflake’s guidance

Snowflake expects its product revenues to be between $162-$167 million in the fiscal fourth quarter, which was barely in line with analysts estimate of $166 million. The revenue guidance implies growth of between 97%-103%. While the growth rate looks astonishingly good, it is lower than reported by the company in the third quarter.

Commenting on the guidance Snowflake’s CFO Mike Scarpelli said: “I would like to remind everyone that because of our consumption-based business model, we do not recognize revenue immediately after a deal is booked. For this reason, you may not see a revenue beat flowing through to the next quarter like you would in a rateable business model.”

Snowflake’s valuation

Also, Snowflake’s revenue growth should be seen in the context of its valuation multiples. It has an enterprise value of $83.2 billion, while analysts expect it to report revenues of around $566 million in the fiscal year 2021. This would mean an enterprise value to revenue multiple of 147x, based on the fiscal year 2021 numbers. That’s the highest valuation multiple for a company of Snowflake’s size. Prior to Snowflake, Zoom Video Communications had the highest valuation multiples among major companies. However, its valuation multiples have since come down after the fall in its shares.

Zoom shares also fell after its latest earnings report, as slowing growth overshadowed the earnings beat.

Analysts ratings and target price

According to the estimates compiled by MarketBeat, Snowflake’s average price target of $264.94 is a discount of 9.5% over yesterday’s closing price. Its highest price target is $350 while $175 is its lowest price target. Of the 22 analysts actively covering the shares, nine have a buy rating while two have a sell. The remaining 11 analysts have rated Snowflake as a hold.

Snowflake shares were trading 3.1% lower at $283.50 in US premarket today. The shares have a 52-week trading range of $208.55-$342. The company had priced its shares at $120 in the IPO, bumping up the price twice during the IPO process. The shares more than doubled on listing day and closed at $253.93. Since then the shares have risen about 15%, which is almost double the rise in the S&P 500 over the same period.