Snowflake’s New Direction: Will AI Investments Pay Off for Investors?
Shares of data cloud service provider Snowflake have seen a significant decline since Frank Slootman, the visionary leader behind the company’s highly successful 2020 IPO, stepped down as CEO. Since Sridhar Ramaswamy took over the helm in February 2024, Snowflake’s stock has plummeted by 28%. This drop has sparked debates among investors about whether now is the right time to buy Snowflake shares or to remain cautious.
Mixed Earnings Report and Strategic Uncertainty
One of the primary factors contributing to the scepticism around Snowflake’s current valuation is its mixed first-quarter earnings report for fiscal year 2025. While the company managed to exceed revenue expectations, it fell short on several key financial metrics and provided disappointing full-year guidance.
Revenue Highlights
- Q1 FY 2025 revenue: $828.7 million, up 33% year-over-year, and $43 million above analyst expectations.
- Q1 FY 2025 adjusted earnings per share: 14 cents, down 6.7% and four cents below consensus expectations.
- Q1 FY 2025 non-GAAP adjusted free cash flow margin: 44%.
Financial Challenges
- Q1 FY 2025 non-GAAP product gross margin: 76.9%, slightly down year-over-year due to increased GPU-related costs tied to new AI initiatives.
- FY 2025 product revenue forecast: Approximately $3.3 billion, representing 24% growth.
- FY 2025 non-GAAP product gross margin forecast: 75%.
- FY 2025 non-GAAP adjusted free cash flow margin forecast: 26%.
CFO Mike Scarpelli attributed the dip in margins to “headwinds associated with GPU-related costs as we invest in new AI initiatives,” indicating a strategic shift towards AI-focused development that has yet to prove profitable. Despite these challenges, Ramaswamy remains optimistic. “We invested more in AI,” he said. “Gross margins declined as we invested ahead of the curve. It was a solid beat and raise.”
The New Leadership’s AI Vision
Ramaswamy, a former Google executive who joined Snowflake after it acquired his AI-focused startup Neeva in 2023, has been actively promoting AI as a cornerstone of Snowflake’s future strategy. His vision includes leveraging AI technologies to enhance data query capabilities and streamline data integration processes.
“In 2023, we have the ability to synthesise information in a fluid conversation through ChatGPT using Neeva,” Ramaswamy stated in a December 2023 interview. He emphasised the phased rollout of AI capabilities, starting with search functionalities and expanding to tools like Copilot to simplify SQL code writing and enable real-time data querying.
Snowflake views AI as a capability that will be infused in all its products, rather than a distinct source of revenue. “We don’t have AI licensing revenue,” Ramaswamy told me. “We are a consumption-based company.” This means Snowflake’s AI-related services are designed to increase user engagement and consumption of their core data cloud services.
AI Initiatives and Partner Collaborations
One reason for optimism is Snowflake’s partnership with Nvidia, announced on June 4, 2024. Ramaswamy called this collaboration “game-changing,” stating that pairing Nvidia’s accelerated computing and software with Snowflake’s AI capabilities in Cortex AI could unlock a new era of AI applications for enterprise data.
“Together, we are unlocking a new era of AI where customers from every industry and skill level can build custom AI applications on their enterprise data with ease, efficiency, and trust,” he added. On June 3, both Ramaswamy and Nvidia CEO Jensen Huang emphasised the importance of creating a data-driven flywheel to drive AI advancements further.
Additionally, Snowflake is excited about Cortex AI — a service that enables companies to build customised AI chatbots. “Cortex AI is bridging between structured and unstructured data,” Ramaswamy explained. As of mid-May, “Over 750 customers are using these capabilities,” he noted. Snowflake is also leveraging its acquisition of TruEra and its AI talent to bolster initiatives like Cortex and Arctic.
Competition and Market Positioning
The competition for top AI technology and talent is fierce, with rivals such as Databricks, Microsoft, and Amazon actively vying for dominance. Databricks, notably, has seen a 200% revenue increase, putting pressure on Snowflake to innovate and adapt rapidly. In response, Snowflake is focusing on enabling customers to use data stored in different places more easily, which Ramaswamy argues is a simpler solution compared to Databricks’ offerings.
To strengthen its market position, Snowflake plans to continue seeking acquisition opportunities. “We will be on the lookout for acquisitions opportunistically,” Ramaswamy told Bloomberg. He acknowledged the scarcity of top-tier AI talent capable of training world-class models, emphasising the need for strategic hiring and acquisitions.
Can Ramaswamy Lead Snowflake To Expectations-Beating Growth?
Ramaswamy is not focused on beating expectations and raising guidance every quarter. Rather, he emphasises a long-term vision for the company. “When it comes to earnings reports, we have a large team,” he says. “We did it together. I am comfortable as CEO and enjoying it,” he adds. Drawing from his experience at Google, where he oversaw substantial growth, he envisions Snowflake becoming the “nervous system of the enterprise” by building a comprehensive data cloud platform.
However, this is Ramaswamy’s first time leading a public company. “As for being CEO of a public company, the closest I got to it was at Google,” he noted. “I managed a very large team in technology, product, and partnerships. It was a more multifaceted job. Neeva was wonderful but I am better suited to leading a team, technology and product vision, and operational excellence.”
Despite the initial challenges and mixed financial performance, some analysts remain optimistic about Snowflake’s future. Needham analyst Mike Cikos, for example, believes that the post-earnings drop in Snowflake’s stock reflects a short-term view. He is bullish on Snowflake, highlighting the company’s investments in AI and new products slated for release later this year.
Despite some promising developments, including the Nvidia partnership and robust revenue growth, Snowflake’s mixed financial performance and strategic uncertainties suggest that investors should approach with caution. As Ramaswamy himself acknowledges, it is still early days for his tenure, and the effectiveness of his new strategies will become clearer over time.
Given the current volatility and lack of clear indicators of sustained profitability, it may be prudent for investors to hold off on buying Snowflake shares until there is more concrete evidence of the company’s ability to achieve expectations-beating growth under its new leadership.
