What Happened:
Shares of data warehouse-as-a-service Snowflake (NYSE:SNOW) jumped 10.6% in the morning session after the company reported a "beat and raise" quarter. Third quarter results exceeded analysts' revenue expectations due to beats on both total customers as well as net revenue retention rate. In addition, gross margin improved, and its non-GAAP operating profit outperformed expectations by a healthy margin. To add to the positives, Q4 guidance for product revenue was higher than Wall Street estimates, and the company raised its full year guidance for product revenue, gross and operating profit, and free cash flow. Management highlighted improving consumption trends, adding, "Our guidance is based on observed patterns and assumes continued consumption stability."
As a reminder, there has been some skittishness around SaaS companies that offer a consumption-based model because customers can very quickly scale down usage of a platform (and therefore revenues paid to the provider) should that customer want to reduce costs. Overall, this was a very good quarter for Snowflake, and it should leave investors feeling more optimistic about the business.
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What is the market telling us:
Snowflake's shares are very volatile and over the last year have had 35 moves greater than 5%. But moves this big are very rare even for Snowflake and that is indicating to us that this news had a significant impact on the market's perception of the business.
The previous big move we wrote about was 23 days ago, when the company gained 6.8% 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.
Snowflake is up 36.2% since the beginning of the year, and at $184.21 per share it is trading close to 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 $726.81.
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