What Happened:
Shares of data warehouse-as-a-service Snowflake (NYSE:SNOW) jumped 6.8% in the morning session following the earnings announcement from another prominent cloud provider, Datadog. Importantly, both Datadog and Snowflake feature consumption-based models where customers are not locked into long-term contracts but instead can scale their consumption of the products and features almost real-time. This means that during good times when demand is high, revenue can grow faster than if the company goes to market with a contract model. On the other hand though, if times are tough or if competition is increasing, customers can scale down usage and revenue will see headwinds faster than if the company goes to market with a contract model. Datadog reported third-quarter earnings that blew past Wall Street's expectations, highlighting the growing demand. It also shows that enterprise customers are not pulling back on spend due to reasons such as cost cuts or workforce reductions. Notably, Datadog recorded a significant improvement in new large contract wins, illustrating that even some of the largest corporations are still early in their cloud adoption journey.
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What is the market telling us:
Snowflake's shares are very volatile and over the last year have had 37 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was six months ago, when the stock dropped 13.4% on the news that the company reported first-quarter revenue, product revenue, and earnings per share (EPS) that surpassed analysts' expectations. Gross margin also improved. However, net retention rate deteriorated. In addition, both next quarter and full year guidance for product revenue and operating income margin missed expectations--this is the major driver of the stock move down. Product revenue guidance was lowered, with the company observing slower-than-expected revenue growth since Easter, as customers remained hesitant to sign large multi-year deals. Overall, it was a complicated quarter for Snowflake with a weak near-term outlook.
Snowflake is up 19.3% since the beginning of the year, but at $161.75 per share it is still trading 15.3% below its 52-week high of $190.98 from June 2023. Investors who bought $1,000 worth of Snowflake's shares at the IPO in September 2020 would now be looking at an investment worth $636.55.
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