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Snowflake Investors Just Got Optimistic News
Here’s one of the big positives from the recent financial results.
Whenever I write about cloud-based data company Snowflake (SNOW -3.38%), I try to do this with a lot of nuances. It’s a complex business with a lot to consider. I don’t want to downplay the good, but I also don’t want to ignore the bad – both sides must be considered to make a confident investment decision.
On May 22, Snowflake released financial results for the first quarter of fiscal 2025. The report contained some optimistic news that some may have overlooked. There are still some concerns about the business (highlighted below), but I mainly want to highlight why this optimistic news is actually good for shareholders.
The good news
Subscription software companies like Snowflake consider something called remaining performance obligations (RPO) in their financial reports. An example of an RPO might involve a company that decides to use its corporate data and believes that Snowflake applications can help. After speaking with a sales representative, the company decides to sign a two-year contract with Snowflake.
If the customer pays monthly, Snowflake’s revenue will reflect the monthly payment. However, management can bring forward your contract and know that you will have two years of monthly payments coming from this new customer. This money is listed as RPO on financial forms.
In the first quarter, Snowflake had an RPO of $5 billion. True, that total was a small step below its $5.2 billion RPO in the fourth quarter of fiscal 2024. But it was up an impressive 46% year over year. In other words, right now the company has much more guaranteed future business than it did at this time last year.
A year ago, Snowflake management highlighted that “customers remain hesitant to sign large, multi-year agreements.” That hesitation began to diminish in the fourth quarter. Management said there was a lot of pent-up demand in the fourth quarter for Snowflake’s newest products. This pent-up demand led to a five-year contract worth $250 million – the biggest deal ever.
Business in the first quarter wasn’t that big for Snowflake, but it still secured a deal worth over $100 million. CFO Mike Scarpelli said, “We are very pleased with our business and the commitment our customers are making to Snowflake’s long-term business.”
And that’s the real good news here. Last year, Snowflake customers were hesitant to make long-term commitments to the platform. However, the company’s RPO is now increasing rapidly and management reports a renewed commitment to the long term, which is really bullish for investors.
What to do now
When investors buy shares in a company, they must have an investment thesis – an explanation of what they believe will happen in the future to make the stock rise. And you need to consider all the different facets of the business, not just one metric.
There are still reasons to be cautious about Snowflake shares. For example, the company gross profit margin and yours Operating margin are expected to fall this year as management purchases expensive equipment to improve its artificial intelligence (AI) applications. How long will it take to implement and how long until your AI infrastructure needs another update? Time will tell.
Additionally, there are questions with Snowflake’s RPO. Typically, investors like to see RPO growth before revenue growth because it often means revenue growth is about to accelerate. But there may be another explanation in this case.
For Snowflake, its average contract was two years at the end of fiscal 2023. However, its record contract in Q4 was a five-year contract. And the average deal length was 2.2 years at the end of fiscal 2024. In other words, the average deal was 10% longer in the last fiscal year. As it spans more time, Snowflake’s overall RPO number is increasing, but that doesn’t necessarily mean growth is about to accelerate. In fact, the management expects a further slowdown in its growth rate in the second half of this fiscal year.
Therefore, there are still other factors to consider when deciding whether or not to buy. That said, Snowflake customers are predominantly moving from hesitation to long-term commitments. Long-term investing is all about the long term, and this is an optimistic global development and shareholders should be encouraged by this.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Snowflake. The Motley Fool has a disclosure policy.