Whenever I write about cloud-based data company Snowflake (SNOW 0.89%), I try to do so with plenty of nuance. It's a complex business with a lot to consider. I don't want to downplay the good but I don't want to overlook the bad either -- both sides must be considered to make a confident investment decision.
On May 22, Snowflake reported financial results for its fiscal first quarter of 2025. The report contained some bullish news that some might have overlooked. There are still some concerns with the business (highlighted below), but I primarily want to point out why this bit of bullish news is really good for shareholders.
The good news
Subscription software companies such as Snowflake factor in something called remaining performance obligations (RPO) into their financial reports. An example of an RPO might involve a business that decides it wants to make use of its enterprise data and believes Snowflake's applications can help. After sitting down with a sales rep, the business decides to sign a two-year deal with Snowflake.
If the customer pays monthly, Snowflake's revenue reflects the monthly payment. However, management can look ahead to its contract and know that it has two years of monthly payments coming in from this new customer. This money is listed as RPO on the financial forms.
In Q1, Snowflake had an RPO of $5 billion. Granted, that total was a small step down from its RPO of $5.2 billion in its fiscal fourth quarter of 2024. But it was up an impressive 46% year over year. In other words, right now the company has far more future business locked in than it did at this same time last year.
A year ago, Snowflake's management pointed out that, "Customers remain hesitant to sign large multi-year deals." That hesitancy started to ease up in the fourth quarter. Management said there was a lot of pent-up demand in Q4 for Snowflake's newer products. This pent-up demand led to one five-year contract worth $250 million -- its biggest deal ever.
The deals in Q1 weren't quite as big for Snowflake, but it still secured one deal worth over $100 million. CFO Mike Scarpelli said, "We're very pleased with our business and more of the commitment that our customers are making in Snowflake long term."
And that's the real good news here. Last year, Snowflake's customers were hesitant to make long-term commitments to the platform. However, the company's RPO is now increasing rapidly and management is noting a renewed long-term commitment, which is really bullish for investors.
What to do now
When investors buy shares of a company, they should have an investment thesis -- an explanation of what they believe will happen in the future to make the stock go up. And it needs to consider all the various facets of the business, not just one metric.
There are still reasons for caution with Snowflake stock. For example, the company's gross profit margin and its operating margin are expected to fall this year as management buys expensive equipment to improve its artificial intelligence (AI) applications. How long will this take to implement and how long until its AI infrastructure needs another upgrade? Time will tell.
Additionally, there are questions with Snowflake's RPO. Typically investors like seeing RPO growth ahead of revenue growth because it often means that revenue growth is about to accelerate. But there may be another explanation in this case.
For Snowflake, its average deal was two years long at the end of its fiscal 2023. However, its record deal in Q4 was a five-year contract. And its average deal length was 2.2 years as of the end of its fiscal 2024. In other words, the average deal got 10% longer in the last fiscal year. Since it covers more time, Snowflake's overall RPO number is rising but it doesn't necessarily mean that growth is about to accelerate. Indeed, management expects a further deceleration in its growth rate in the back half of this fiscal year.
So there are still other factors to consider when deciding whether to buy in. That said, Snowflake's customers are predominately moving from hesitancy to long-term commitments. Long-term investing is all about the long term, and this is an overall bullish development and shareholders ought to be encouraged by it.
