Snowflake Is PLUNGING | Did the AI Bubble Just POP?

Summary

This video discusses the recent 20% stock drop for Snowflake after Q4 2024 earnings, and analyzes whether this signals an 'AI bubble' popping. It gives context around the CEO retirement, the strong quarterly metrics like 29% revenue growth and 41% increase in remaining performance obligations, as well as potential contributing factors to the share decline like lower than expected guidance likely tied to an overly conservative new CEO. It concludes Snowflake’s execution remains strong, with the stock drop presenting an opportunity, though dilution could still be a concern.

Takeaways

• 😊 CEO Frank Slootman is retiring but will remain chairman. He still owns $1.9 billion in Snowflake shares.
• 😮 Slootman selling $225M in shares is not insider trading, it was a pre-planned transaction.
• 📈 Revenue grew 29% and beat expectations. Margins also expanded nicely.
• 😐 Growth is slowing though. Guidance came in below expectations.
• 🤔 New CEO and management being very conservative with guidance.
• 👍 Net revenue retention still strong at 131%.
• 😎 Number of large customers spending over $1M up 40%.
• 🤑 Strong cash flow and balance sheet.
• 😕 Valuation still very expensive even after expected 20% drop.
• 🧐 If they can grow free cash flow 21% annually, today's valuation may be justified.

Q & A

Why is Frank Slootman retiring as CEO of Snowflake?

Frank Slootman is retiring from his role as CEO after 5 years. He will remain Chairman of the Board. His retirement seems planned, as Snowflake is hiring a new CEO, Sagar Ramaswamy, who previously worked as an executive at Google.

Why did Frank Slootman sell $225 million in Snowflake shares last quarter?

Slootman's share sale was pre-planned and approved ahead of time. He still owns around $1.9 billion in Snowflake shares after the sale, so it does not indicate lack of confidence.

Did Snowflake report strong financial results this quarter?

Yes, by most metrics Snowflake reported financial results that beat Wall Street estimates and their own guidance for the quarter. Revenue, margins, earnings, and cash flow were all up significantly year-over-year.

Why did Snowflake share price drop 20% after earnings?

The share price dropped because Snowflake issued lower than expected guidance for next quarter and full year revenue growth compared to analyst estimates.

Does the revenue guidance update indicate Snowflake's growth is slowing?

Not necessarily. Management stated they are being intentionally conservative in guidance to account for consumption pattern changes and exclude any potential upside from new product launches.

What metrics indicate the strength of Snowflake's business?

Key metrics to watch are net revenue retention over 120%, total & large customers, remaining performance obligations, and workloads from new products. These indicate Snowflake's market position and growth potential.

Does Snowflake have high valuation multiples?

Yes, on a price/earnings and price/cash flow basis valuation is very high. But a reverse DCF analysis shows revenue growth in the low 20% range could justify valuation.

Is the AI bubble bursting because of Snowflake?

No, Snowflake's results and guidance indicate controlled, managed growth not a bursting bubble. The new CEO is being set up to guide strong long term growth.

What should investors watch for next with Snowflake?

Guidance updates, customer & workloads metrics, free cash flow margins. These will indicate if growth re-accelerates and new products gain traction over next few quarters.

Does the analyst have confidence in Snowflake still?

Yes, the overall tone indicates continued long term confidence in Snowflake's market position, differentiation, and growth potential despite near term speed bumps.

Outlines

00:00

😀 Snowflake's Q4 earnings results and outlook

Snowflake reported strong Q4 earnings results, beating estimates on revenue, profit, and other metrics. However, guidance for the next quarter and full year was below expectations. The CEO is retiring but will remain Chairman. A new CEO was appointed who previously worked at Google. Guidance assumes no revenue contribution from new product initiatives until data proves otherwise.

05:03

😊 Growth trends remain healthy despite lower guidance

Key growth metrics for Snowflake remain very strong, even if slowing, including 131% net revenue retention and 22% customer growth. Remaining performance obligations grew 41%, showing continued revenue momentum. The company plans to hire extensively this year. Lower guidance seems conservative given new product launches and comparison to optimization trends at other companies.

10:04

😎 Reasons for conservative guidance and outlook

Snowflake cited consumption patterns in fiscal 2023 and roll out of new potentially revenue-impacting products like Iceberg as reasons for conservative guidance. They assume these products will contribute no revenue until proven otherwise. Guidance seems aimed at setting up the new CEO for success.

15:05

😉 Valuation and next steps for investors

Valuation metrics look high on a standard basis but reasonable if strong cash flow margins persist. Top line needs to grow about 21% for 10 years to justify current valuation. Execution and guidance updates will be key things to monitor moving forward.

Keywords

💡Snowflake

Snowflake is a cloud data platform company that went public in 2020. The video discusses Snowflake's latest earnings report, which missed analyst expectations and led to a big drop in the stock price. Snowflake is considered a key beneficiary of the AI revolution, so some are questioning whether this signals an 'AI bubble' is popping.

💡AI Bubble

The 'AI bubble' refers to the hype and high valuations around AI/cloud companies like Snowflake. Since Snowflake missed growth expectations, some are wondering if this signals a broader pullback or reality-check for high-flying AI stocks.

💡Revenue Growth

A key metric for high-growth companies like Snowflake is revenue growth rate. Snowflake grew revenue 29% this quarter but guided to slower growth next quarter of 27%, versus Wall Street expectations of 29%. This revenue guidance miss was a key reason for the post-earnings stock drop.

💡Customer Metrics

The video analyzes key customer health metrics for Snowflake including net revenue retention rate, total customers, and large customers over $1M in spend. These metrics showed continued strong momentum, giving optimism about Snowflake's long-term outlook.

💡Product Initiatives

Snowflake discussed new product initiatives like its Iceberg product, but declined to factor any contribution from these products into guidance. This conservative approach was another reason for the weaker growth outlook and stock drop.

💡Guidance Philosophy

On the earnings call, Snowflake said it plans to take a more conservative guidance approach now, not baking in upside from new products or initiatives until it sees traction. This philosophy shift was noted as a reason for the weaker guidance.

💡Frank Slootman

Frank Slootman was the CEO who took Snowflake public. His retirement and $225M stock sale adds some uncertainty, though the video argues this was a pre-planned sale not insider trading.

💡Sarb Seshamani

Sarb Seshamani is the new incoming CEO of Snowflake, having previously worked as an executive at Google. The video speculates the outgoing CEO is setting up conservative guidance for his successor to outperform.

💡FinChat

FinChat is a sponsor of the video that's shown providing detailed metrics and analysis on Snowflake. It's highlighted as a useful tool for following stocks and earnings analysis.

💡Valuation

The video examines Snowflake's valuation, noting that traditional P/E ratios look very high but a discounted cash flow model shows the growth rate required to justify the valuation seems potentially achievable given the business model.

Highlights

CEO Frank Slootman is retiring but will remain as chairman of the board

New CEO is Sourabh Ramaswami, who previously worked as an executive at Google

Slootman selling shares is not insider trading, it was a pre-planned transaction

Revenue grew 29% year-over-year, beating estimates

Gross margins expanded to almost 75%

131% net revenue retention rate is very healthy

Total number of customers grew 22% year-over-year

Customers spending over $1 million grew 40% year-over-year

Guidance was lower than expected due to conservative assumptions

Not factoring potential revenue from new product initiatives into guidance

Plans to hire 1,000 new employees this year

Valuation is high but reasonable based on growth expectations

If FCF margins reach 38%, 21% CAGR could justify current valuation

Setting up new CEO for success by under promising

Will be interesting to see if guidance updated based on new product traction

Transcripts

data warehouse Specialists snowflake was

supposed to be one of the key

beneficiaries of the AI Revolution but

the company came out with earnings this

evening and shares are trading down by

more than or as much as

20% following the earnings so does this

mean that snowflake has finally popped

the AI bubble let's spend the next 10

minutes trying to figure that out my

name is Brian stoel and as the time the

recording I do own a sizable chunk of

shares of snowflake I want to give a

shout out to finch. for sponsoring

today's video you're going to see a lot

more from them in a minute so this was

the fourth quarter of fiscal 2024 ending

in January and after the company's

probable sizable drop tomorrow it'll be

worth in the ballpark of 60 to 61

billion do now before even getting to

any of the big numbers there was this

announcement Frank slutman who came over

and did a great job over the last five

years as CEO of the company is retiring

he will remain on as chairman of the

board stepping in for him is SAR

ramaswami and it is worth noting that he

came over in an acquisition and had

worked at Google in an executive

position there for a number of years as

well if you go on Twitter or X you will

see a lot of people making a big deal

about the fact that Frank slutman sold

$225 Million worth of shares over the

past quarter and this is clearly a sign

of insider trading if you see anyone

saying that stop following them in fact

block them now and here's why one of two

things is going on one they're toying

with your emotions and they know better

than that or two they're not smart

enough to realize what's going on in the

context and I say that because this was

a pre-planned transaction period

everything had done way beforehand and

even despite selling $225 Million worth

of shares which is a lot lot of money to

anyone on planet Earth suin still owes

$1,900 Million worth of shares after the

drop is going to happen in other words

it is a huge nothing Burger okay that

out of the way let's move on to the

numbers for the quarter Revenue was up

29% that beat Wall Street's estimates

management only guys for product Revenue

doesn't include service Revenue but also

came in well ahead of estimates not non

Gap earnings which is primarily backing

out sizable amounts of stock-based

compensation was 35 cents per share well

ahead of guidance more than double where

it was last year let's look at margins

all of these on a non-gaap basis which

again primarily exclude stock based

compensation great news across the board

gross margins expanded quite a bit to

almost

75% operating margins up to 99.2% net

margins doubled to 16.4 4% if we look at

free cash flow was up meaningfully to

$325 million net income was up

meaningfully again and this balance

sheet could not be in better shape with

about5 billion doll in cash and no

long-term debt now let's look at the

Dynamics of this now this is with gap

numbers so it does include stock-based

compensation so you've got that 29%

Topline growth but the cost of that

revenue is only up 18% well when Revenue

grows faster than the cost of that

Revenue you get this gross profit

growing 39% which is fantastic it is

worth pointing out that operating

expenses grew Just a Touch faster than

Revenue did at 30% so that's worth

keeping in mind and it is also worth

remembering that this company does hand

out a lot of stock-based compensation

the number of diluted shares outstanding

is up about 3% from last year although

as a percentage of Revenue it's trending

down but it is still a very high number

and that is is still a legitimate thing

that investors need to keep their eye on

what else happened during the quarter

well now we're going to transition over

to Fin chat. and it is just a few hours

after snowflake reported earnings and

I'm about to show you some amazing

capabilities on fin chat. if you want a

subscription click the link in the show

notes below and you'll get 25% off and

here's what I mean if I head on over

type in the snowflake ticker symbol and

go down to this tab right here called

segments and kpis this is the differen

maker for fin chat. for me I click on

that and the most important things that

I want to see are listed right here

specifically I want to look at these

three stats right here net revenue

retention total customers and total

customers over $1

million and I'm also going to throw in

the growth rates for them so I'm going

to say show me what the growth rates are

for these things and I will pull that up

as well and so here is what we see now

you're going to see a whole bunch of

stuff here I'll turn a bunch of them off

so that we can look at them one by one

so first net revenue retention of 131%

well what does that mean that means that

snowflake has not only held on to all of

its customers from the same time last

year and we don't include any of the new

customers they got which they got a

bunch of but if we just look at that

same cohort they're spending 31% more

year-over-year now that is down from the

astronomically high

178% before but it is still very healthy

all right let's see what else we can

focus on here next let's focus on total

customers and we see that total

customers excuse me I clicked the wrong

thing here we see that total customers

are now sitting at about

9500 that is at up significantly from

the 7700 at the end of the last fiscal

year and if we look at the growth rates

while of course these growth rates are

slowing and that is understandable the

number of customers using snowflakes

products is still up

22% now let's look at one more here and

what we're going to look at now is we're

going to look at its customers that are

over paying over $1 million and That

Grew From 333 to 461 customers that is a

growth rate of about 40% again not as

high as it was before but also totally

understandable there's a couple other

numbers that are really important to

know from the quarter remaining

performance obligations because remember

the way that snowflake works is that

it's kind of like going to an amusement

park where if you want to ride the rides

or maybe a better one would be like a

county fair if I want to take my son or

my daughter on the rides I don't

actually give money to the person

running the ferris wheel I go to this

ticket booth and I pay them $5 and I get

five tickets in return and then I turn

those tickets in

to the person running the ferris wheel

and that's how my kids get to ride the

ferris wheel believe it or not it's kind

of how snowflake Works where companies

pay a certain amount upfront and then as

queries are run using uh the technology

that snowflake has then it gets counted

its Revenue but the company has already

collected a lot of this and so this is

both collected and contracted Revenue

into the future and that's in remaining

performance obligations and you see an

enormous 41% jump in remaining

performance obligations from last year

to this year that's fantastic and it's

faster than Revenue growth which means

there's a strong Pipeline and the amount

of that Revenue that they expect to

realize within the next year was also up

29% which matches the growth rate that

we saw in this quarter and that 29% is

going to be important moving forward

we'll get to why in just a minute the

company also I believe is building out a

secondary Moote in terms of network

effect effects why because a lot of

companies can now sell their data that

they have on snowflake to other

companies as long as they are snowflake

customers as well which creates a

network effect especially for the

financial services company 28% of

customers are doing this and the total

number of customers that are doing this

is up 43% from the same time last year

and the number of listings of these

things is up 27% so I believe that is a

strong Network effect that is building

around the company as well now so far so

good CEO retiring that's understandable

but uh what's going on why are shares

down 20% this is why now again

management only guides for product

Revenue so pay more attention to the

percentage changes than the absolute

numbers the company said during the

current quarter they expect Revenue to

grow 27% was Wall Street was looking for

29% and for the full year the company is

expecting 22% growth whereas Wall Street

was hoping for 30% growth now that is a

legitimate reason to think that this AI

bubble might be

popping let's dig a little bit deeper

though because if you go into the

conference call which by the way you can

listen to and see the transcript from

almost immediately onf

chat. they said snowflake said that

there are a whole bunch in of

initiatives that they're rolling out

this year and they've rolled out a lot

of initiatives in the past and they've

been significant Revenue contributors

but they are saying that they are not

including not including the potential

Revenue benefits from any of these

initiatives moving forward and they will

not manage their expectations to

previous targets until they have more

data in other words we're going to roll

these products out and assume that

they're going to bring in zero and once

we see that they're not zero we then

we'll add to it they also said that they

plan to add approximately a th000

employees this year which is a reason

that they're guiding for their margins

to be lower but you wouldn't add a th000

employees if you're having a huge

Revenue slowdown that you really think

is going to affect the

company and they also said that they

were being more conservative this year

given the consumption patterns that they

saw in fiscal fiscal 2024 which means

the last 12 months we all know that all

of that optimization that happened over

the past year we've heard from data dog

we've heard from cloud Flair we've heard

from these players and they say they

don't see that optimization anymore so

why is snowflake deciding to say well

we're going to assume that those

patterns continue and then they also do

have some new products that are becoming

generally available uh to the public and

they're not taking any of them into

account again as I said before an

important one of them is Iceberg which

is something where customers can choose

to use it and then SN snowflake does not

get paid anymore for storing data they

are willing to make that tradeoff

because they believe that by doing this

they will get more workloads and at the

end of the day if you are a decades long

investor in Snowflake it's the workloads

that matter but it can cause a revenue

slowdown over the short term now they

haven't actually seen that play out

they're just assuming that that's what's

happening and until they see that those

incremental workloads do come they're

not going to forecast that as well so

let's just take a full stop here for one

second really popular CEO announces he's

retiring still owns $1.9 billion worth

of the shares outstanding uh and is

staying on as chairman of the board

company's going to hire a thousand new

employees while saying that they expect

to grow a lot slower than Wall Street

was expecting they're rolling out a lot

of new products but they're not going to

include any of the contributions from

those new products until they see that

they actually

contribute and they're expecting that

the kind of optimization that happened

in 2023 is going to continue on to the

next year even though we know all the

other major players in the space have

said that probably won't happen why

would they do that I think if I I I I

think that it makes a lot of sense to

say because Frank slutman is doing a

great job of passing the Reigns on to

the next CEO and setting an extremely

low bar for the company to jump over

moving forward now I'm a shareholder so

take that for what it's worth but the

fact of the matter is is that I actually

think this makes all the sense in the

world in terms of an explanation and

that and and so what am I going to watch

moving forward as a shareholder first is

that net revenue retention rate 131% is

very healthy if as long as it stays

above 120% I'll be happy to the guidance

updates because I would not be surprised

urised at all to see some guidance

updates take place here as they see that

oh look at that this new product that we

spent a ton of R&D money on and have

done a great job of rolling out products

before actually brought in more than

zero dollars we're going to update it

and say that it'll bring up more number

three I'm going to watch the stable Edge

customers and number four remaining

performance obligations I think the moat

is definitely widening around the

company and the thesis is very much on

track it's gets a great score on my

antifragile score and now we move to a

really interesting part which is

valuation because Shares are down 20%

now there's a lot of different things

that we could look at I think that this

is a company in stage three to stage

four and so now let's head on over again

to fin chat. to look at some of these so

if we look at snowflakes PE ratio it's

ugly because it's negative and this is

on a gap basis because that is one thing

I will admit there is a lot of

stock-based compensation what about a

forward PE ratio well that's also very

ugly it's trading about 251 times

forward earnings which sounds obscene

what if we look at free cash flow the

company has about $778 million of

trailing free cash flow but boy that's

still expensive over a hundred times

trailing free cash flow okay well what

about forward free cash flow ye 83 times

and this doesn't factor in that 20% drop

that's going to take place but either

way it's already still pretty clear

what's going on here but to me this is

not the right way to judge this I think

a reverse discounted cash flow model

makes much more sense so you can get a

copy of this if you click in the show

notes below here's how it works you type

in the ticker symbol which is SN W you

put in the trailing 12 months free cash

flow which in the case of snowflake is

now

$778

you put in what do you think the

terminal growth rate would be I do 3%

for a lot of these fast growing

companies you put it in a discount rate

I do 10% to say Market matching okay so

I'm just saying if it's a market

matching investment how much does that

free cash flow have to grow now we see

$230 in here as the price but if we just

go to Yahoo finance and we type in

Snowflake what we can see is is that as

the time of this recording it's really

about

$183 so we want this to match $183 and

we say well okay well how fast does uh

does free cash flow need to grow every

year for 10 years and the answer is

about 26% because you see that's in the

ballpark of

$183 could snowflake grow its free cash

flow by 26% every year for 10 years that

might be a big step up when the revenue

is only expected to grow

22% however there is no doubt to me that

this company could have at the very

least 38% free cash flow margins why

because remember the way that it works

it's that ticket booth uh analogy that I

gave you where the money is coming in

and so the free cash flow as long as the

company's growing should almost always

be higher than profits or revenue and so

if we give them a 38% free cash flow

margin well then that changes the story

a little bit because we're talking about

a company that has $2.8 billion in

Revenue over the trailing 12 months and

if we give it a 38% free cash flow

margin well then we've got about 1

billion and change in free cash flow

well how much does I if they accomplish

that today then how much does the Top

Line need to grow over the next 10 years

to justify today's price well this this

one can jump down a little bit 20% no 21

1% about 21% so let's back up and think

about this if snowflake can accomplish

38% free cash flow margins 10 years from

now then it needs to grow its top line

by about 21% per year over the next 10

years it only only expects to grow that

Top Line by 22% this year which says boy

that seems like a really I don't think

they can do that however everything that

I just showed you showed that they're

doing everything they can legally to set

this up for the new CEO to be successful

to me this is like the president who

leaves office and leaves a note in the

desk and says the next time you get in

trouble blame me and number two is the

next time you get in trouble after that

sit down and write a letter that's what

Sloan's doing he's setting up this next

leader to do really well I believe that

they can hit 21% per year over 10 years

moving forward especially for a usage

based model I really don't think that

that is far-fetched now does that mean

the stock is an absolute steal right now

no I wouldn't say that especially with

the dilution that you're seeing but I

don't think that this is Mission

critical I if the AI bubble bursts I

don't think it should be because of this

because what I see is a company that's

actually executing really well and

setting up their new CEO to do really

well so that's my take on what's going

on again if you want to get these stats

go to

finch. and then what will I be doing in

my own personal portfolio this is one of

my top Holdings well if you want to

follow along what I'm going to do after

these shares become way more affordable

then I have partnered with Savvy Trader

you can click on the link in the show

notes below use the code YouTube and you

can follow my portfolio the antia excuse

me the antifragile portfolio in real

time to see what I'm doing as well as be

part of community where you can ask and

get get questions answered so check that

out as well now it'll be really

interesting to check out what's going on

with snowflake over the next couple

quarters because remember that guidance

it's going to be really interesting to

see if they add on to it as they see

that these new products do bring in more

than Z moving forward we'll check back

in on that one if you have thoughts on

the quarter leave them in the show notes

below and until 90 days from now when we

get the next check-in with snowflake

Brian out