To The Moon

$Snowflake(SNOW)$

Snowflake: Past and Present

Today, we’re diving into Snowflake. In today’s session, I’ll explore why we made that decision. To be clear, I don’t dislike Snowflake. So, if you’re a fan of the company, don’t worry—this isn’t a takedown. Think of this as an objective exploration of enterprise software.

Snowflake's Financial Performance

In it, we discussed how the rally following Snowflake’s Q3 fiscal 2025 update was likely deserved but speculated that it might not sustain. Sure enough, the rally has faded somewhat, and the stock is now back to where it was in Q1 of 2024.

On the surface, Snowflake’s Q3 financials were impressive. The company reported a 29% year-over-year growth in product revenue—a strong result as Snowflake navigates the evolving landscape of accelerated computing hardware and the rapidly growing data consumption needs of enterprise customers.

This growth is a promising sign, especially as enterprise software-as-a-service (SaaS) companies begin to see the long-anticipated boost from artificial intelligence. However, it’s worth noting that advancements in accelerated computing and AI don’t automatically translate to benefits for SaaS companies.

When we refer to AI, we’re talking about accelerated computing powered by generative AI and the latest wave of machine learning breakthroughs—thank you, NVIDIA, for driving much of this innovation. However, as Kasey points out, these developments aren’t guaranteed to benefit companies like Snowflake without the right business models in place.

One of Snowflake’s advantages is its consumption-based pricing model, which sets it apart from traditional SaaS companies. This model positions Snowflake well for the paradigm shift brought about by accelerated computing hardware, where consumption-based pricing becomes increasingly important for cost-conscious customers.

Additionally, we believe there could be a resurgence of older revenue models, such as perpetual license revenue and pre-cloud licensing frameworks. This shift may benefit companies with strong IP-driven revenue streams, such as NVIDIA, Pure Storage, Broadcom, and others. Stay tuned for an upcoming video where we’ll explore this topic in greater detail.

Challenges and Strategic Moves

A key challenge for companies like Snowflake, which have thrived over the past decade on the SaaS business model, is the need to adapt to the rapidly evolving landscape. These adjustments come with significant costs, and this has been a recurring theme for Snowflake.

In September, Snowflake raised over $2 billion through convertible notes to address ongoing expenses, including a much-needed stock repurchase program. This move aimed to counterbalance stock-based compensation (SBC), which continues to impact the company. For example, Snowflake's GAAP share count for 2024 rose approximately 2% year-over-year, with the non-GAAP share count peaking at the start of fiscal 2025.

This highlights a broader challenge. While software businesses are traditionally asset-light and rely on partners like AWS for infrastructure, Snowflake faces rising costs in stock-based compensation to attract and retain skilled employees. These experts are critical for leveraging new AI and accelerated computing technologies.

Stock-based compensation remains high, though its growth rate has slowed compared to previous years. Simultaneously, depreciation and amortization costs have increased, reflecting investments in AI equipment and infrastructure. These factors have left Snowflake with stagnant operating income growth in 2024, a less-than-ideal scenario.

Cash Flow Insights

The cash flow statement offers further clarity:

• Investing Activities: Snowflake's spending on property, equipment, and internal-use software remains small and manageable.

• Financing Activities: The most significant development here is the stock repurchase of over $1 billion in Q3 fiscal 2025, a key reason for issuing convertible debt. Additionally, Snowflake used a portion of this debt to fund its acquisition of the data integration platform Datavolo.

This acquisition, though unglamorous, is strategically important. It strengthens Snowflake’s backend infrastructure, providing developers on its platform with greater flexibility in managing growing data flows for AI training and machine learning applications. While the exact purchase price remains unknown, further details are expected in early 2025.

Positioning for the Future

Snowflake is positioning itself for the AI era, but this comes with steep costs. The company’s balance sheet remains strong, with over $4 billion in cash. However, the new debt and ongoing investments will be key areas to monitor, particularly as they move into fiscal 2026.

In summary, Snowflake is navigating a period of significant transformation. Its strategic moves—though costly—are necessary to stay competitive in an AI-driven market. Investors should keep a close eye on the financial impact of these adjustments in the coming quarters.

Valuation and Future Outlook

Let’s delve into valuation, where things have become somewhat complicated. A key metric to focus on is Snowflake’s free cash flow per share.

Snowflake is growing at an impressive pace—30% year-over-year—which is faster than at the start of this year. This strong growth helps offset some of the dilution effects we discussed earlier and lends support to its valuation. Importantly, Snowflake is now mature enough to manage free cash flow per share growth.

Currently, the company reports 27 cents of free cash flow per share, as of its latest earnings release. However, there’s a concern: free cash flow per share has essentially plateaued on both a quarterly and annualized basis.

Free Cash Flow

Looking at the annualized free cash flow per share over the past 12 months (through Q3 fiscal 2025), there’s been no growth. While the upcoming fiscal year-end report might show a slight uptick, sustained growth in this metric is critical for justifying Snowflake’s valuation and supporting its recent rally into 2025.

At this stage of Snowflake’s evolution, free cash flow per share growth is essential. Although the company is investing heavily to position itself for the AI era, this metric must return to expansion mode sooner rather than later if shareholders expect to see meaningful appreciation in the stock price. Investors should keep a close watch on this as a key driver of Snowflake’s long-term valuation.

Portfolio Updates

This brings us to the question: Am I not adding Snowflake to the portfolio, what companies are we focusing on?

Why the Vanguard IT ETF (VGT) remains an excellent investment choice for 2025, especially if enterprise software businesses start benefiting from the anticipated AI tailwinds.

To recap, the VGT ETF is heavily weighted toward large-cap technology giants, but it also includes a long tail of several hundred mid- and small-cap companies, many of which could enjoy similar AI-driven momentum this year.

My current view is that we’re moving beyond the era where pinpoint stock picking is the optimal strategy. For newer investors, diversification will be key. With broad expectations of healthy earnings-per-share growth for the S&P 500 and NASDAQ Composite in 2025, the rising tide of the market is likely to lift many boats. This makes a holding like VGT particularly attractive in a crowded software market.

Notably, Snowflake is included in the VGT ETF, typically ranking between the 30th and 40th largest holding depending on daily market fluctuations.

That said, I’am not abandoning individual stock investments. To clarify, I’am not bearish on Snowflake—it has potential, but it’s facing significant headwinds. I recognize that many enterprise software companies will continue to face challenges in the near term.

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