The snowflake melts on contact with the clouds


Snowflake’s share price was already down 22% for the year before the latest results.


Photo:

Brendan Mcdermid / Reuters

Not even Snowflake SNOW -17.81%

can sometimes compete with itself.

The cloud software company was considered a hot property on its list in September 2020 and has remained so since. Demand for its data warehousing software used by enterprises to accelerate their business analytics capabilities kept growth off the charts. Revenue more than doubled year-over-year in the previous nine quarters ahead of Snowflake’s fiscal fourth quarter results on Wednesday. Its latest report continued the trend: revenue jumped 101% to around $384 million.

But even snowflakes are governed by the laws of gravity. Such a scorching pace becomes much harder to maintain with a larger revenue base. Snowflake expects product revenue to grow about 80% year over year in its current quarter and about 66% for the full fiscal year ending next January. Those projections were broadly in line with existing Wall Street estimates, but counted as a disappointment for a company that has beaten consensus revenue forecasts by nearly 8% on average since its IPO. Snowflake’s stock price fell 15% on Thursday morning.

Considering that Snowflake’s stock price was already down 22% for the year before the results, the reaction seems too harsh. But investors have been fleeing cloud computing stocks in recent months. The sector’s high valuations are seen as a turning point in a risky market.

Overall market weakness has still left Snowflake without the benefit of the doubt as the company entered its latest results as one of the most valued cloud stocks trading at just under 40 times forward sales, or nearly four times the average of the BVP Nasdaq Emerging Cloud Index. Okta,

another cloud stock with a valuation at the upper end of the group’s range, fell 10% on Thursday morning after its own earnings and outlook beat Wall Street projections by a smaller margin than previous reports.

Thursday’s sell-off still keeps Snowflake’s multiple in the high 30s range. Analysts at least weren’t scared off; two-thirds still view Snowflake as a buy after the results. These results also served as a reminder that Snowflake’s usage-based business model is inherently less predictable than most subscription-based cloud software providers.

The company said on its call that the technical improvements “improved efficiency more than expected” in the last quarter, which actually reduced the credit consumption that generates its revenue. As for the reasons for the near-term weakness, Deutsche Bank’s Brad Zelnick noted that “it’s about as good as it gets” because such improvements will ultimately make Snowflake’s service more attractive to more people. clients.

Investors just need to be able to weather the storm.

Write to Dan Gallagher at dan.gallagher@wsj.com

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