Why Snowflake Stock Dropped -- Then Popped -- After Earnings

Snowflake crushed on sales growth in the first quarter, but missed badly on earnings.

What happened

Shares ofcloud computing softwarecompany Snowflake(NYSE:SNOW)tumbled more than 6% early this morning, after reporting earnings last night -- and just a couple weeks after analysts at Rosenblatt Securities had given the all-clear and predicteda strong first quarter for Snowflake.

As of 2:30 p.m. EDT, however, the stock has turned around and is nowup3.3%.

Heading into the fiscal first quarter of 2022 (that's right, Snowflake's financial calendar is a year ahead), analysts were looking for Snowflake to report sales of $212.9 million, and lose only $0.16 per share on those sales. Rosenblatt thought those expectations conservative, and thereforeupgraded the stockin expectation of a sales beat. As it turned out, the analyst was right about that.

Snowflake reported $228.9 million in Q1 sales.

So what

That's the good news. The bad news is that despite beating on sales, Snowflake appears to have missed -- badly -- on earnings, reporting a per-share loss of $0.70 per share.

So on the one hand, Snowflake had a great quarter for growth. Product revenue alone (the bulk of Snowflake's business) grew 110% year over year. So, too, did total revenue -- up 110%. And CEO Frank Slootman hailed this triple-digit growth as "reflecting strength in customer consumption."

At the same time, however, Snowflake scored an operating profit margin of negative 90% on those sales, according to generally accepted accounting principles (GAAP) -- not good.

Now what

Will it get better? In one sense, maybe yes. In another sense, though -- probably not. Forecasting results for the fiscal second quarter of 2022, Snowflake says its product revenue will continue to grow strongly, up 88% to 92% to a range from $235 million to $240 million. However, management says that its pro forma operating profit margin on those sales will be negative 19%.

Management didn't give a GAAP estimate for operating margin, but seeing as its pro forma margin in Q1 was negative 16%, this suggests that margins are weakening, not strengthening, even as Snowflake's revenue grows.