Why Did Snowflake Cut Margin Outlook After A Solid Q1? 11 Analysts Dive Deeper

Shares of Snowflake Inc SNOW tanked in early trading on Thursday, after the company reported results for its first quarter.

The results came amid an exciting earnings season. Here are some key analyst takeaways.

RBC Capital Markets analyst Matthew Hedberg reiterated an Outperform rating, while raising the price target from $220 to $226.

• KeyBanc analyst Eric Heath reaffirmed an Overweight rating, while lifting the price target from $185 to $200.
• Rosenblatt Securities analyst Blair Abernethy maintained a Buy rating, while raising the price target from $185 to $195.
• Needham analyst Mike Cikos reiterated a Buy rating, while reducing the price target from $240 to $210.
• JPMorgan analyst Mark Murphy reaffirmed an Overweight rating, while raising the price target from $170 to $185.
• Morgan Stanley analyst Keith Weiss maintained an Equal-Weight rating and price target of $175.
• Truist analyst Joel Fishbein reaffirmed a Buy rating and price target of $210.
• Mizuho analyst Gregg Moskowitz reiterated a Buy rating and price target of $205.
• Goldman Sachs analyst Kash Rangan maintained a Buy rating and price target of $220.
• Oppenheimer analyst Ittai Kidron reaffirmed an Outperform rating and price target of $220.
• Piper Sandler analyst Brent Bracelin reiterated an Overweight rating and price target of $240.
• Bank of America Securities analyst Brad Sills maintained a Neutral rating and price target of $200.

Check out other analyst stock ratings.

RBC Capital Markets: Snowflake reported "strong" results for the quarter, with product revenue growing 34% year-on-year to $789.6 million, handsomely beating consensus of $751.5 million, Hedberg said in a note. "This points to a 5.1% beat vs 3.1% beat last qtr," he added.

Bookings were solid, with deals of over $100 million each in the first and second quarters, the analyst stated. "Large customers also meaningfully increased usage of core offerings in what management views as a stable optimization environment," he further wrote.

KeyBanc Capital Markets: Snowflake delivered a strong beat and raise quarter, Heath said. "The quarter highlighted Snowflake’s accelerated pace of product innovation in AI and quelled some investor long-term concerns on iceberg," he added.

Management raised product revenue guidance by $50 million to $3.30 billion, representing 24% growth and beating consensus of $3.27 billion, the analyst stated. "F2H implicitly lowered, we believe, only because mgmt. is electing to be more conservative," he further stated.

Rosenblatt Securities: Snowflake's RPOs grew by 46% year-on-year to $5 billion, Abernethy said. The company's net retention declined again, "but remained a relatively strong 128%, while the $1m+ customer count grew a healthy 485% y-o-y," he added.

The company also announced plans to acquire AI observability platform TruEra, the analyst stated. "Snowflake continues to have several important products moving to GA this year, including Apache Iceberg table support, Cortex, Unistore and more," he further wrote.

Needham: Snowflake outperformed buyside expectations backed by "solid trends" and management indicated strong consumption in February and March, albeit moderating in April, Cikos said. "The company exceeded its internal quota for New Customer Acquisition and Consumption.”

"Snowflake is investing in a rapidly-evolving market to ensure long-term positioning, and has a number of new products coming to market later this year (i.e. Iceberg, Hybrid Tables, Snowpark Container Services)," the analyst wrote. The company is also investing in AI initiatives like Cortex and Arctic, he further stated.

JPMorgan: Snowflake has recorded sequential product revenue growth of above 7% in three out of the past five quarters, which is "likely a validation of optimization stabilization," Murphy said.

The company reduced its full-year margin outlook across the board, with its proforma product gross margin projection being lowered from 76% to 75%, its operating margin guide being cut from 6% to 3% and the adjusted free cash flow margin trimmed from 29% to 26%, the analyst stated. He added, however, that investors may "accept the downward revision to the margin outlook in favor of leaning into AI-related GPU spend and hiring."

Morgan Stanley: "Accelerating bookings growth, an uptick in new customer adds, and accelerating query volumes further reinforce the stabilization in demand in Q1," Weiss said.

The massive revenue beat and accelerating growth in query volumes should "bolster investor confidence in waning optimization headwinds and a conservative FY25 guide," the analyst wrote. He added, however, that pressures on cost per query and declining free cash flow margin outlook suggest "a more competitive environment."

Truist Securities: "The results this quarter were a reminder of the mission-critical role that SNOW is playing in their customers’ data architectures," Fishbein said. He added, however, that the company's margin upside could be "tempered by GPU investments going forward."

Snowflake continues to drive its AI roadmap "at an accelerating pace," the analyst wrote. "We believe that their relentless focus on cost efficiency and business applicability will drive interest from enterprise buyers," he further stated.

Mizuho Securities: While Snowflake's product revenue grew 34% year-on-year, its net new product revenues of $51.5 million represents a strong 48% year-on-year growth and a 6% beat, Moskowitz said.

While management raised their full-year product revenue guidance by more than the first-quarter beat, the operating margin and adjusted free cash flow outlook "was surprisingly lowered due to higher GPU expenses," the analyst stated. "While disappointing, we would not lose sight of the fact that higher GPU costs will translate to higher revenue downstream (not in guidance)," he added.

Goldman Sachs: The company's non-GAAP operating income beat expectations by 29%, while product revenue reaccelerated sequentially, recording growth of 34% year-on-year, Rangan said.

"Given Sridhar Ramaswamy's recent appointment as CEO, we believe Snowflake is favorably positioned to deliver leading product innovations while addressing large, durable market opportunities like GenAI (Cortex, Arctic), ML / AI (Snowpark), and OLTP (Unistore)," the analyst wrote. "We believe that under Mr. Ramaswamy's leadership, product innovation vectors are being thoughtfully balanced against commerciality through a heightened focus on driving increased consumption," he added.

Oppenheimer: Snowflake management “outlined innovations around AI/GenAI with its Snowpark framework and availability of additional services (Cortex, Arctic, Un6istore, Container Services, I6ceberg Tables) and initial positive uptake, which can provide additional uplift to growth in FY25 and beyond," the analyst wrote.

"We continue to see a long tail of strong top-line growth as workload migrations and Snowflake’s technological advantage result in continued share gains, and as consumption recovers after a long period of optimizations," he further stated.

Piper Sandler: The company delivered the biggest product revenue dollar beat since its IPO in 2020 IPO, Bracelin said, citing how "cRPO growth reaccelerated back above 30% while overall RPO also accelerated to 46% y/y aided by another large ($100M+) renewal.”

"Future AI growth levers were also reinforced with a total of 750 Cortex AI customers within a few weeks of general availability and several G2K migrations from Spark to Snowpark," the analyst wrote. The 28% decline in the stock over the past three months on potential growth headwinds and risks related to leadership transition "appear overdone.”

BofA Securities: Snowflake's customer metrics suggest that upside was driven by “stable consumption patterns and new customer signings," Sills wrote in a note.

"However, Iceberg Tables (to be GA in June) is expected to start having impacts on storage revenue (~11% of revenue) in the 2H, which raises some questions on the sustainability of the strength," he added.

SNOW Price Action: Shares of Snowflake had declined by 3.29% to $157.97 at the time of publication on Thursday.

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