How Palantir Could Thrive as Snowflake Stumbles
The markets were taken aback when cloud computing company Snowflake posted its first-quarter earnings, revealing revenues of $623 million against an estimated $609 million. The initial beat on revenue was well-received; however, the delight was short-lived. Forecasting second-quarter product revenue between $620 million to $625 million, a shortfall from Wall Street's $646 million expectation, made matters worse. The falling dominoes continued when Snowflake lowered its full-year product revenue outlook to about $2.6 billion, 100 million short of Wall Street's estimation of $2.7 billion.
This could potentially spell trouble for Snowflake, whose frothy valuation puts it at a hefty $57 billion market cap. The effects were reflected in Snowflake's share price, which plummeted from $177 on May 24th to $143. This downtrend in the share price has knocked the company's market cap down to $46 billion, a stark reminder of the volatile nature of the stock market. Snowflake's substantial market cap, even after its decline, is still seen as a "massive premium", especially compared to other players in the market. For instance, the market cap of Palantir, another significant player in the tech industry, is hovering around the $25-30 billion mark. This discrepancy makes the decline in Snowflake's share price all the more concerning.
Another critical point of discussion is Snowflake's decision to increase its stock-based compensation (SBC). In 2023, Snowflake's stock-based compensation as a percentage of revenue stood at a substantial 42%. This increase is significant, particularly considering the stock-based compensation in Q1 alone was $174 million, jumping to $264 million by Q1 of 2023, a 53% YoY increase. The underlying issue here is who Snowflake is awarding this increased stock-based compensation to. It's worth noting that the company spent 70% of its revenue on sales and marketing, implying that a significant portion of the increased SBC might be going to its sales team. The efficacy of this strategy is debatable. While incentivizing salespeople with stock options might promote short-term gains in customer acquisition, it does little to foster long-term product development and innovation. The real question is, are they building a product that will matter and remain relevant for the next decade?
In a surprising move, Snowflake recently announced the acquisition of Neeva, a company focused on intelligent search solutions for cloud data management. Founded by a former senior vice president of ads at Google, Neeva was designed to provide superior search results without advertising. Despite closing the consumer-facing side of its search engine, Neva still has the potential to offer Snowflake an enterprise-grade solution, provided the merger goes smoothly.
A key point to note is that merging companies often face significant cultural, technical, and operational challenges, and it's yet unclear how well Neva's technology will integrate with Snowflake's existing offerings. However, it does show that Snowflake acknowledges a need to innovate and expand their product range, which could be a promising sign for the future.
How This Affects Palantir
Snowflake's lower than expected revenue results coupled with its massive stock-based compensation plan - which accounted for a staggering 42% of its revenue - raises questions about its financial management. This could potentially erode investor confidence. Palantir, while also criticized for its stock-based compensation plan, has managed to reduce it significantly year over year, a fact that could reassure investors about its financial prudence.
Moreover, Snowflake's lack of a significant technological moat, its rising operating costs and growing competition could limit its future growth. This situation could provide an opening for Palantir to capture a larger share of the market. Palantir's sophisticated data analytics software, characterized by an enduring technological moat, could be a strong attraction for clients seeking more reliable and innovative solutions.
Snowflake's acquisition of Neva, a search engine company, to boost its AI capabilities can be seen as an acknowledgement of its relative weakness in this area compared to Palantir. Palantir has long invested in AI, and its AI integration platform (AIP) has been under development for years. Palantir’s strength in AI could serve as a strong differentiator, attracting potential clients and investors, especially given the increasing significance of AI in today's data-driven world.
In conclusion, while Snowflake's slower growth could raise eyebrows amongst its own investors, it may be a boon for Palantir. It not only provides a chance for Palantir to assert its steady financial performance, but it also allows the company to emphasize its superiority in AI and data analytics capabilities. For Palantir investors, this could be an exciting moment to watch the company potentially increase its market share.
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