SaaS-pocalypse, not now
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Snowflake escaped the market's software-stock penalty box after posting earnings results, even as traders shrugged off the numbers from fellow software stalwart Salesforce.
The big picture: Software shares have struggled, as investors bet AI will undercut the previous profitability of software-as-a-service (SaaS) companies.
State of play: Snowflake's surge on Thursday proves that it's possible — though not easy — for such stocks to get back into the market's good graces.
By the numbers: Both Snowflake and Salesforce reported better-than-expected quarterly sales and profit numbers after the market close on Wednesday.
- Indeed, both had results that were more than 20% higher than Wall Street forecasts, according to FactSet.
The intrigue: Yet, shares of Salesforce fell 0.8% Thursday, while Snowflake romped nearly 37% — its best day since going public in 2020.
Zoom in: Salesforce's $11.3 billion revenue outlook for next quarter was short of analysts' estimates, which helps explain the market reaction.
- Snowflake's full-year product sales guidance of $5.84 billion, meanwhile, was stronger than what Wall Street expected, citing the expected continued growth of its Cortex Code product.
Yes, but: There was another big difference.
- Snowflake also announced a five-year contract to buy $6 billion in computing capacity from Amazon Web Services, effectively giving it access to lower-priced AI infrastructure.
- That deal can help Snowflake preserve some of its profit margin, even as more of its sales are driven by AI activity, such as Cortex Code. (AI products typically have lower margins than traditional cloud computing, because of the costs of computing power.)
How it works: "Lower bandwidth costs," Snowflake CFO Brian Robins told an analyst who asked about the company's ability to maintain its 75% adjusted product profit margin. "I talked about the AWS contract, and so we're offsetting it there. So that's how we're able to do that."
The bottom line: Snowflake is providing a template for a play that other software companies can run: Simply create a fast-growing, AI-related product and simultaneously commit to preserving high profit margins.
- That's easier said than done.
