Snowflake: A clear path to long-term upside
The go-to-market and product delivery engines are generating strong momentum for the business
While investor expectations were high, Snowflake SNOW 0.00%↑ delivered a very solid start demonstrating another quarter of consumption resiliency, strong bookings and expanding profitability.
Just 1 year ago in the same quarter, investors over-reacted after Frank Slootman left the company, with the share price falling almost 30% due to the news.
And we took the advantage of that very attractive risk/reward opportunity to start a position in Snowflake.
Since then, Snowflake has rallied more than 80% in the last 8 months.
2025 is looking to be Snowflake’s year, with a clear path to long-term outside.
Solid 1Q
Snowflake generated one of the strongest revenue growth among peers and competitors, with product revenues growing 26% from the prior year to $997 million.
Product revenues beat expectations by 4.5%, above what is usually seen as a good beat of about 3%.
When we adjust for the leap year, product revenue growth would have been 28% from the prior year. This means that compared to the prior quarter’s 28% growth, Snowflake also showed no deceleration.
During the management meeting, management shared that the strong revenue growth came from both meaningful growth from new products like Snowpark and Dynamic Tables which outperformed expectations in 1Q and areas of strength in the technology and retail sectors.
RPO growth accelerated to 34% year-over-year growth, accelerating from the 33% seen last quarter.
Product gross margins came in in-line with expectations at 75.7%
Operating margins expanded by 442 basis points to 9% in 1Q as Snowflake continues to improve on efficiencies throughout the organization while investing in growth.
Free cash flow margin weakness was expected and communicated in the last quarter as Snowflake had 2 large customers closing $100 million deals late in the quarter, which resulted in booking behavior that impacts the seasonality of its free cash flow.
I also found that the capital expenditures spending this quarter was $45 million, above the typical mid-teens million-dollar range for capital expenditures.
As I will share more in the guidance section, Snowflake continues to reiterate the free cash flow margin of 25% for the full year, so management expects that the free cash flow this year will be more second half weighted.
Solid outlook
The guidance philosophy continues to be based on observed customer behaviours management is seeing today.
Furthermore, in the last 5 quarters, management has spent lots of time to identify new workloads going into production and they currently have ‘pretty good” visibility on those.