Story Stocks^®

Coming off a disappointing Q2 earnings report in which it guided for a sharp slowdown in product revenue growth, Snowflake (SNOW) rebounded in a big way last night, delivering a strong beat-and-raise Q3 performance that also shined a spotlight on its AI-based growth catalysts. In addition to its Q3 earnings report, SNOW announced an acquisition of Datavolo and a new partnership with Amazon-backed (AMZN) Anthropic, as the company dives deeper into its AI ambitions. 

• In the wake of that Q2 earnings report, concerns surrounding slowing consumption growth due to macroeconomic headwinds and rising competition from Microsoft (MSFT) and privately held Databricks were amplified. As such, the stock couldn't generate any traction and was down 35% on a year-to-date basis heading into the Q3 print. SNOW's results and guidance, though, eased those fears, and confidence that its new AI products and innovations will spark strong growth ahead has risen.
• Product revenue, which is a leading indicator of growth, jumped by 29% yr/yr to $900.3 mln, crushing its guidance of $850-$855 mln. This growth was fueled by a combination of new customer wins, especially in the enterprise category, and increasing usage from existing customers. In Q3, the number of customers with over $1.0 mln in product revenue grew by 25% yr/yr to 542, while SNOW's net revenue retention rate remained firm at an impressive 127%.
• Even as SNOW significantly ramps up its investments in AI and new product innovations -- R&D expenses were up 33% to $442.4 mln in Q3 -- its profitability is improving. Non-GAAP operating margin came in at 6%, comfortably beating its guidance of 3%, driven by operating leverage resulting from the robust top-line growth.
• What's particularly exciting about that growth is that new products are beginning to contribute in a more meaningful way. For instance, Snowpark, which allows customers to use programming languages, such as Python, Java, and Scala, all within SNOW's cloud platform, is on track to account for about 3% of total revenue. 
• It's also becoming apparent that SNOW is well-positioned to capitalize on the emergence of AI. The company disclosed that more than 3,200 accounts are now using machine learning and AI features and that AI adoption of its new products, such as Snowflake Intelligence and Unistore, is strong with over 1,000 deployed use cases.
• Furthermore, the new partnership with Anthropic will enable large language models created by Anthropic to be available within SNOW's Cortex AI -- its AI service that provides a suite of GenAI features on Amazon Web Services. This unified platform will allow SNOW's customers to create AI products and apps more efficiently, and at scale, using Antropic's Claude 3.5 model.

The main takeaway is that not only did SNOW melt away investors' concerns about a steady downturn in product revenue growth, but it also put itself back on the map as a major AI play. While the stock is still expensive with a 1-year forward P/S north of 10x, the lofty valuation is more justifiable now that SNOW's growth catalysts are coming into view.