Snowflake (NYSE: SNOW) shares wallowed near long-term lows for years as concerns about slowing growth and financial health weighed on sentiment, but the times have changed. The Q3 results reveal persistent strength, swelling client counts, and depending penetration of services, revealing its industry-leading position in data management and value for investors. The news includes significant increases in all metrics that provide leverage to the bottom line and greatly improve the financial outlook. The company will face headwinds as it grows and scales the business but is well-positioned to do so, and the stock price now has the support of analysts.
The analysts' response to the FQ3 results is overwhelmingly bullish, with more than a dozen raising their price targets. The price target increases are substantial; most are solidly double-digits, with many in the 20% to 30% range and the consensus target firming. Consensus assumes fair value near the $170 level, but the revision trend, which reversed the downtrend in place, suggests a move to the $190 to $200 range is likely, and this is a low forecast. The company’s guidance assumes the business trends will continue, leaving the door open for outperformance and strong guidance for 2025.
Snowflake’s Business Is Snowballing on Acquisition and Penetration
Snowflake had a solid quarter, sustaining a high-20% growth rate in Q3 and outpacing the consensus estimates. The $940.09 million in revenue is up 28.3% YOY and outpaced MarketBeat’s reported consensus by nearly 500 basis points on client acquisition and penetration. The company’s largest client group grew by 25%, with systemwide net retention at an impressive 127%. The net retention rate is down compared to last year, but due to the law of large numbers, the dollar contribution is larger and expected to continue growing on new client wins. The remaining performance obligation, an indicator of future revenue growth, is up by 55%, equal to six quarters of business at the Q3 pace.
The margin news is mixed but favorable to investors. The company experienced margin compression, but it was less than expected and insufficient to create adjusted losses or negative cash flow. The company’s gross margin contracted by 290 basis points, and the GAAP losses increased due to increased marketing, R&D, and SG&A costs, all intended to fuel and support growth. More importantly, the adjusted income is positive and 3500 basis points ahead of the analysts' forecasts, producing positive quarterly cash flow.
The guidance also favors higher share prices with revenue and profitability for Q4 and the full year ahead of forecasts. The company expects product revenue to grow about 1% sequentially and by 23% compared to last year, a cautious estimate given the Q3 results and client metrics.
Anthropic Deal to Drive Growth in 2025
Among the catalysts for Snowflake's melt-up is a new deal with Anthropic. The deal will allow businesses and enterprises to enhance their AI applications on Snowflake’s platform, which provides a unified solution for data, including storage, processing, and analysis. Anthropic is expected to post $1 billion in annual revenue this year, so this is a significant opportunity for Snowflake.
The price action in Snowflake surged more than 30% on the Q3 news, confirming support at the low end of a trading range along with a surge in trading volume. Trading volume is more than double the 30-day average, suggesting the move has legs. The target for critical resistance is near the mid-point of the range, which may be reached soon, aligning with the high-end of the analysts' target range. A move to $200 may come before the end of 2024; a move above $200 would be bullish for the market and likely lead the stock price to the range’s high end near $245.
