As a new era of AI has seemingly begun (spurred on by ChatGPT), so has a new thesis for investing in Snowflake (SNOW -3.74%). Indeed, Snowflake’s platform for digital data has quite the head of steam with lots of customer spending obligations, and the company struck a new partnership with none other than Nvidia (NVDA 2.39%) ahead of its financial update for the second quarter of fiscal 2024 (ended July 2023). 

But Nvidia’s epic boom in AI sales hasn’t trickled down to Snowflake, at least not yet. On the contrary, management forecast yet another cool-off for the third quarter. Will that change as organizations look for ways to implement AI into their operations? 

Solid numbers, but some metrics are only “stabilizing”

Before delving into some of the specific financial metrics, it’s important to understand how Snowflake makes money. It charges customers based on “consumption,” or use, of its data platform. Customers can sign long-term obligations to spend a certain amount on data storage and compute and score some discounts in the process, and any excess use over that contract tends to get charged at a higher variable rate.

With that in mind, Snowflake reported product revenue (storage and compute spending, excluding a bit of variable consulting and engineering revenue) of $640 million in Q2, a 37% year-over-year increase. What’s wrong with that?  

Well, product revenue grew at a 50% clip in Q1, and was up 70% last year. The slowdown is poised to continue, with the Q3 outlook implying just 28% to 29% year-over-year growth.

The problem, as CEO Frank Slootman and CFO Michael Scarpelli explained, has been customer bookings (current invoiced amounts and future obligations not yet invoiced) and consumption. Snowflake continues to pick up lots of new customers, and many existing ones are consuming higher amounts of storage and compute. However, some of the largest customers are in cash conservation mode this year over economic worry. The result has been a flatlining of remaining performance obligation (RPO, which includes future customer bookings), and many of these customers lowering their consumption rates closer to what they had previously booked with Snowflake.

A chart showing Snowflakes RPO remaining flat for the last three quarters.

Image source: Snowflake.

AI will certainly reignite Snowflake’s hot run, right?

Now about that Snowflake and Nvidia partnership. As part of its computing layer, Snowflake had announced it would plug Nvidia’s GPUs and NeMo software platform into its own services to allow developers to train large language models (LLMs), and perform other predictive AI tasks, directly within Snowflake when working with their data sets.  

Surely with all the talk about generative AI this should create an acceleration in Snowflake’s growth, right? 

Maybe, but not yet. As Slootman explained on the earnings call:

We cannot sort of unleash AI and have no business model to pay for it, [or] people will get tired of that really, really quick. So these are — these GPUs from Nvidia, they aren’t cheap as powerful as they are. So we all have to bring that into alignment and into focus and have a sensible go-forward strategy. So a lot of the use cases will focus on, “What are we getting for this [AI service],” right? This is not just fun and games and planning your next trip to Yellowstone. I mean, people are going to be asking very, very hard-hitting questions, “What is [this AI service] doing for us?”

In other words, if the new AI partnership with Nvidia reignites growth, it may lag behind some of the current hype going on out there. 

The good news Snowflake mentioned

Also on the last earnings call, Scarpelli did mention positive signs were emerging:

The sentiment really seemed to change in July with customers really reengaging with us. And so — and I think we’ll have good bookings. But that doesn’t equate to consumption. It takes time for the consumption to come in.

If customer obligations are on the mend, that’s a good indication that product revenue growth could accelerate before too long, perhaps by the end of this year if the most recent trend holds. This seems to be in keeping with what other cloud software companies have been reporting as of late, too. 

In the meantime, bear in mind Snowflake remains a premium-priced stock at about 80 times trailing-12-month free cash flow. If you are interested in Snowflake for the long haul, consider using a dollar-cost average plan and build a position over time.

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