Snowflake(NYSE: SNOW) started out its life as a public company with high ambitions and plenty of market enthusiasm. However, since late 2021, it has been a somewhat disappointing investment for long-term shareholders. Just in 2024, share prices of the cloud-based data platform provider are down 44% even as the Nasdaq-100 Technology Sector index gained 6%.
Snowflake has been a perennial underachiever and it has lost 56% of its value since it went public in September 2020. Judging by the market sentiment regarding the stock, it looks like there isn't going to be a reprieve for its investors anytime soon.
After the market closed on Aug. 21, the company released results for its fiscal 2025 second quarter, which ended July 31. In the next day's trading session, share prices of Snowflake fell by 15% even though its revenue increased at a faster-than-expected pace and its earnings landed ahead of Wall Street's expectations. It appears that concerns about the company's slowing growth as well as disappointing guidance led investors to press the panic button again.
Is the latest slide in Snowflake stock an opportunity for investors looking to buy a discounted, but fast-growing, company that could deliver healthy gains in the long run?
Snowflake sellers may have made the wrong move
In its fiscal Q2, Snowflake's revenue increased 29% year over year to $869 million, which was higher than the $852 million consensus estimate. However, the company's non-GAAP earnings dropped to $0.18 per share from $0.22 per share in the same quarter last year. That number, though, was higher than Wall Street's estimate of $0.16 per share.
The drop in Snowflake's earnings was attributable to a contraction in its margins. More specifically, Snowflake's adjusted gross margin fell by 1 percentage point to 73% last quarter. Its non-GAAP operating margin contracted by 3 percentage points to 5%. However, these drops were the result of the investments the company is making in graphics processing units (GPUs) "to fulfill customer demand for our newer product features."
The new product features that Snowflake is referring to are its artificial intelligence (AI)-focused offerings. The company has lined up a number of generative AI-based products for launch in the current fiscal year that will allow its customers to use their proprietary data to build and deploy various types of applications.
The good part is that Snowflake's focus on adding AI-related functionality to its data cloud platform seems to be bearing fruit. The company's customer base increased by 21% year over year to 10,249 customers last quarter. However, the increase in spending by its existing customers was even more impressive.
Snowflake reported a net revenue retention rate of 127%. That metric compares the product revenue generated by Snowflake's customers during a particular period to the spending by those same customers in the prior year period. A reading of more than 100% reflects that existing customers have ramped up their spending on its offerings.
Notably, the number of Snowflake customers providing more than $1 million in product revenue in the trailing 12 months increased 28% year over year in fiscal Q2 to 510. This was faster than the growth rate of Snowflake's overall customer base. The combination of an increase in Snowflake's customer base as well as its ability to generate more money from existing customers is setting it up for robust long-term growth.
The company's remaining performance obligation (RPO) -- contracted future revenue that has yet to be recognized -- makes that clear. RPO increased an impressive 48% year over year last quarter to $5.2 billion. The growth rate in this metric was way higher than the growth in Snowflake's revenue, and significantly exceeded the company's full-year product revenue growth guidance of 26% to $3.35 billion.
So there is a good chance that Snowflake's growth rate could accelerate in the future, which is why investors would do well to look past the near-term guidance.
A lucrative long-term growth opportunity
Management's guidance for product revenue of $850 million to $855 million for the current quarter would translate into year-over-year growth of 22%. That's just above the analysts' consensus estimate of $851 million, but it would still be a slowdown from the 29% growth in product revenue last quarter. However, we have already seen that Snowflake's revenue pipeline has improved considerably, so there is a good chance that it could eventually end up delivering stronger growth.
What's more, Snowflake expects its total addressable market to expand from $152 billion last year to $342 billion in 2028. The addition of AI-enabled features should allow it to capture a bigger share of the opportunity on offer, leading to stronger growth in the future. Additionally, the company is expected to return to earnings growth from next year following this year's anticipated decline to $0.60 per share from $0.98 per share in fiscal 2024.
SNOW EPS Estimates for Current Fiscal Year data by YCharts.
More specifically, Snowflake's earnings are forecast to jump 55% in the next fiscal year, followed by a 48% increase in the one following that. The market could reward this terrific growth in Snowflake's earnings with more upside. At the same time, the adoption of AI in Snowflake's addressable market is already helping it build up a solid revenue pipeline for the future, and that could allow it to sustain its robust growth rate for a long time to come.
As such, the company now has stronger catalysts and a much larger addressable market to tap, and its numbers are an indication that it is capitalizing on that opportunity already. So, the steep decline in Snowflake stock can be treated as a buying opportunity its fortunes could finally turn around after years of underperformance.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.
