Snowflake’s sales growth has slowed considerably, with its FQ2 revenue growing by just under 29%, down from nearly 33% in the previous quarter. Projections for FQ3 suggest an even sharper decline, with product revenue growth forecasted to rise by only 22% year-over-year. The slowdown in revenue is significant, with growth rates expected to dip to as low as 20% in FQ4. In past quarters, Snowflake experienced higher sequential growth on a much smaller base, indicating that the company’s growth challenges are becoming more pronounced as it scales.
The deceleration in sales has not been mitigated by the company’s focus on AI. During the earnings call, Snowflake highlighted the adoption of AI technologies among its 2,500 customers.
However, these new product features, such as those centered around AI products like Cortex, are not expected to materially impact revenues in the near term. Snowflake’s guidance for FY 2025 does not factor in any significant contributions from these AI initiatives, further dampening expectations for a quick turnaround.
Snowflake’s recent performance is further complicated by lingering cybersecurity issues. The company faced a series of cyberattacks where customer data stored on their platforms was compromised, partly due to inadequate sign-on controls by customers. Additionally, the recent CrowdStrike (CRWD) cybersecurity incident has only added to investor concerns about the company’s data security posture.
Despite the concerns, Snowflake points to growth in remaining performance obligations (RPOs), with commitments reaching $5.2 billion, a 48% increase. Yet, management admits that RPOs may not be the best leading indicator for growth, given that product revenue is declining. The company also contends with multiple top customers operating on flexible, month-to-month contracts, which creates uncertainty in long-term revenue projections.
Snowflake remains priced for perfection, trading at 12 times its FY25 revenue target of $3.5 billion, with a fully diluted market cap of $41.4 billion. However, the stock price has already fallen nearly 50% this year, and non-GAAP gross margins are slim, sitting at just 5% in the most recent quarter.
While Snowflake generates significant free cash flow due to upfront customer payments, it also carries future obligations, further straining its financial outlook.
The key takeaway for investors is that while Snowflake continues to innovate in AI and data management, it faces substantial headwinds due to slowing growth, cybersecurity concerns, and a valuation that does not reflect current market realities. Given these factors, potential investors might be wise to stay on the sidelines until there is clearer evidence of a turnaround in the company’s growth trajectory.
