 from theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. When Frank Sluteman took service now public, many people undervalued the company, positioning it as just a better help desk tool. You know, it turns out that the firm actually had a massive TAM expansion opportunity in ITSM, customer service, HR, logistics, security, marketing and service management, generally. Now, stock price followed over the years the stellar execution under Sluteman and CFO, Mike Scarpelli's leadership. Now, when they took the reins at Snowflake, expectations were already set that they'd repeat the feat. But this time, if anything, the company was overvalued out of the gate. The thing is, people didn't really better understand the market opportunity this time around other than that it was a bet on Sluteman's track record of execution and on data, pretty good bets. But folks really didn't appreciate that Snowflake wasn't just a better data warehouse that it was building what they call a data cloud. And we've termed a data super cloud. Hello and welcome to this week's Wikibon Cube Insights, powered by ETR. In this Breaking Analysis, we'll do four things. First, we're going to review the recent narrative and concerns about Snowflake and its value. Second, we're going to share survey data from ETR that will confirm precisely what the company's CFO has been telling anyone who will listen. And third, we're going to share our view of what Snowflake is building, i.e. trying to become the de facto standard data platform. And four, convey our expectations for the upcoming Snowflake Summit. Next week at Caesars Palace in Las Vegas. Snowflake's most recent quarterly results, they've been well covered and well documented. It basically hit its targets, which for Snowflake investors was bad news. Wall Street piled on expressing concerns about Snowflake's consumption pricing model, slowing growth rates, lack of profitability and valuation given the current macro market conditions. The stock dropped below its IPO offering price, which you couldn't touch on day one, by the way, as the stock opened well above that and certainly closed well above that price of 120. And folks express concerns about some pretty massive insider selling throughout 2021 and early 2022. All this caused the stock price to drop quite substantially and today it's down around 63% or more year to date. But the only real substantive change in the company's business is that some of its largest consumer facing companies while still growing dialed back their consumption this past quarter. The tone of the call was, I wouldn't say contentious, the earnings call, but Scarpelli, I think was getting somewhat annoyed with the implication from some analyst questions that something is fundamentally wrong with Snowflake's business. So let's unpack this a bit. First, I want to talk about the consumption pricing. On the earnings call, one of the analysts asked if Snowflake would consider more of a subscription based model so that they could better weather such fluctuations in demand. Before the analyst could even finish the question, CFO Scarpelli emphatically interrupted and said, no. The analyst might as well have asked, hey, Mike, have you ever considered changing your pricing model and screwing your customers the same way most legacy SaaS companies locked their customers in so you could squeeze more revenue out of them and make my forecasting life a little bit easier? Consumption pricing is one of the things that makes a company like Snowflake so attractive because customers, especially large customers facing fluctuating demand and their end demand can dial down usage for certain workloads that are maybe not yet revenue producing or critical. Now, let's jump to insider trading. There were a lot of insider selling going on last year and into 2022. I mean a lot. Slutman, Scarpelli, Kristen Pleinerman, Mike Spicer, several board members, they sold stock worth many, many hundreds of millions of dollars or more at prices in the 200s and 300s and even 400s. You remember the company at one point was valued at $100 billion surpassing the value of service now, which is stupid at this point in the company's tenure. And the insider's cost basis was very often in the single digits. So on the one hand, I can't blame them. You know, what a gift the market gave them last year. Now, also famed investor, Peter Lindsay, famously said insiders sell for many reasons, but they only buy for one. But I have to say, there wasn't a lot of insider buying of the stock when it was in the 300s and above. And so yeah, this pattern is something to watch our insiders buying now. I'm not sure we'll keep watching. Snowflake is pretty generous with stock-based compensation and insiders still own plenty of stock. So maybe not, but we'll see in future disclosures. But the bottom line is Snowflake's business hasn't dramatically changed with the exception of these large consumer facing companies. Now, another analyst pointed out that companies like Snap, he pointed to companies, Snap, Peloton, Netflix and Facebook have been cutting back. It's Carpelli said, and what was a bit of a surprise to me? Well, I'm not going to name the customers, but it's not the ones you mentioned. So I thought I would have, you know, if I were the analyst, I would have followed up with, how about Walmart, Target, Visa, AmEx, Expedia, Priceline or Uber? Any of those, Mike? I doubt he would have answered me. Anything, anyway, the one thing that Carpelli did do is update Snowflake's fiscal year, 2029 outlook to emphasize the long-term opportunity that the company sees. This chart shows a financial snapshot of Snowflake's current business using a combination of quarterly and full year numbers and a model of what the business will look like according to Carpelli and Dave Vellante with a little bit of judgment in 2029. So this is essentially based on the company's framework. Snowflake this year will surpass $2 billion in revenues and targeting $10 billion by 2029. Its current growth rate is 84% and its target is 30% in the out years, which is pretty impressive. Gross margins are going to tick up a bit, but remember, Snowflake's cost of goods sold are dominated by its cloud costs. So it's got a governor there has to pay AWS, Azure and Google for its infrastructure. But high seventies is a good target. It's not like the historical Microsoft 80, 90% gross margin, not that Microsoft is there anymore, but Snowflake was going to be limited by how far it can how much it can push gross margin because of that factor. It's got a tiny operating margin today and it's targeting 20% in 2029. So that would be $2 billion. And you would certainly expect its operating leverage in the out years to enable much, much, much lower SG&A than the current 54%. I'm guessing R&D is going to stay healthy, coming in at 15% or so. But the real interesting number to watch is free cash flow. 16% this year for the full fiscal year growing to 25% by 2029. So 2.5 billion in free cash flow in the out years, which I believe is up from previous Garpelli forecast in that 10 year view, 2029 view. And expect the net revenue retention, the NRR, it's going to moderate, it's going to come down, but it's still going to be well over 100%. We pegged it 130% based on some of Mike's guidance. Now today, snowflake and every other stock is well off. This morning, the company had a $40 billion value would drop well below that midday, but let's stick with the 40 billion on this sad Friday in the stock market, we'll go to 40 billion. And who knows what the stock is going to be valued in 2029, no idea. But let's say between 40 and 200 billion. And look, it could get even uglier in the market as interest rates rise and if inflation stays high, until we get a Paul Volcker like action, which is going to be painful from the Fed share. You know, let's hope we don't have a repeat of the long drawn out 1970s stagflation, but that is a concern among investors. We're going to try to keep it positive here. We'll do a little sensitivity analysis of snowflake based on Garpelli and Volante's 2029 projections. What we've done here is we've calculated in this chart, today's current valuation at about 40 billion and run a cagger through 2029 with our estimates of valuation at that time. So if it stays at 40 billion in valuation, can you imagine snowflake growing to a $10 billion company with no increase in valuation by the end by 2029, fiscal 2029, that would be a major bummer and investors would get a 0% return at 50 billion, 4% cagger, 60 billion, 7% cagger. Now 7% market return is historically not bad relative to say the S&P 500, but with that kind of revenue and profitability growth projected by snowflake combined with inflation, that would again be a kind of a buzzkill for investors. The picture at $75 billion valuation is much brighter, but it picks up at 100 billion, even with inflation that should outperform the market. And as you get to 200 billion, which would track by the way revenue growth, you get a 30% plus return, which would be pretty good. Could snowflake beat these projections? Absolutely. Could the market perform at the optimistic end of the spectrum? Sure it could. It could outperform these levels. Could it not perform at these levels? You bet, but hopefully this gives a little context and framework to what Scarpelli was talking about and his framework, not withstanding the market's unpredictability. You're on your own there, I can't help. Snowflake looks like it's going to continue either way in amazing run compared to other software companies historically and whether that's reflected in the stock price again, I can't predict. Okay, let's look at some ETR survey data which aligns really well with what snowflake is telling the street. This chart shows the breakdown of snowflakes net score. Net score remember is ETR's proprietary methodology that measures the percent of customers in their survey that are adding the platform new, that's the lime green at 19%. Existing snowflake customers that are spending 6% or more on the platform relative to last year, that's the forest green, that's 55%, that's a big number. Flat spend, that's the gray at 21%, decreasing spending, that's the pinkish at 5% and churning. That's the red, only 1% are moving off the platform, tiny, tiny churn. Subtract the red from the greens and you get a net score that nets out at 68%. That's a very impressive net score by ETR standards but it's down from the highs of the 70s and mid 80s where high 70s and mid 80s where snowflake has been since January of 2019. Note that this survey of 1500 or so organizations includes 155 snowflake customers. What was really interesting is when we cut the data by industry sector, two of snowflakes most important verticals are finance and healthcare. Both of those sectors are holding a net score in the ETR survey at its historic range, 83%. Hasn't really moved off that 80% plus number, really encouraging. But retail consumer showed a dramatic decline this past survey from 73% in the previous quarter down to 54% in just three months time. So this data aligns almost perfectly with what CFO Scarpelli has been telling the street. So I give a lot of credibility to that narrative. Now, here's a time series chart for the net score and the pervasion in the dataset meaning how penetrated snowflake is in the survey. Again, net score measures spending, velocity on a specific platform and pervasion measures the presence in the dataset. You can see the steep downward trend in net score this past quarter. Now for context, note the red dotted line on the vertical axis at 40%. That's a bit of a magic number. Anything above that is best in class in our view. Snowflake still a well above that line but the April survey as we reported on May 7th in quite a bit of detail shows a meaningful break in the snowflake trend as shown by ETR's call out. On the bottom line, you can see a steady rise in the survey, which is a proxy for snowflakes overall market penetration. So steadily moving up and up. Here's a bit of a different view on that data bringing in some of snowflakes peers and other data platforms. This XY graph shows net score in the vertical axis and pervasion on the horizontal with the red dotted line at 40%. You can see from the ETR call outs again that snowflake while declining in net score still holds the highest net score in the survey. So of course the highest in data platforms while the spending velocity on AWS and Microsoft data platforms outperforms that of, sorry, while the spending velocity on snowflake outperforms that of AWS and Microsoft data platforms. Those two are still well above the 40% line with a stronger market presence in the category. That's impressive because of their size. And you can see Google Cloud and MongoDB right around the 40% line. Now we reported on Mongo last week and discussed the commentary on consumption models and we referenced Ray Mo Lenshaw's what we thought was quite thoughtful research that rewarded MongoDB for its forecasting transparency and accuracy and less likelihood of facing consumption headwinds. And I'll reiterate what I said last week that snowflake while seeing demand fluctuations this past quarter from those large customers is not like a data lake where you're just going to shove data in and figure it out later. No schema on right, just throw it into the pond. That's going to be more discretionary. And then you can turn that stuff off more likely. Now you bring data into the snowflake data cloud with the intent of driving insights which leads to actions, which leads to value creation. And as snowflake adds capabilities and expands its platform features and innovations and its ecosystem, more and more data products are going to be developed in the snowflake data cloud. And by data products, we mean products and services that are conceived by business users and that can be directly monetized not just via analytics, but through governed data sharing and direct monetization. Here's a picture of that opportunity as we see it. This is our spin on our snowflake total available market chart that we've published many, many times. The key point here goes back to our opening statements. The snowflake data cloud is evolving well beyond just being a simpler and easier to use more elastic cloud database. Snowflake is building what we often refer to as a super cloud that is an abstraction layer that companies that comprises rich features and leverages the underlying primitives and APIs of the cloud providers, but hides all that complexity and adds new value beyond that infrastructure. That value is seen in the left example in terms of compressed cycle time. Snowflake often uses the example of pharmaceutical companies compressing time to discover a drug by years, great example, there are many others. And then through organic development and ecosystem expansion, snowflake will accelerate feature delivery. Snowflake's data cloud vision is not about vertically integrating all the functionality into its platform. Rather it's about creating a platform and delivering secure, governed and facile and powerful analytics and data sharing capabilities to its customers and partners in a broad ecosystem so they can create additional value on top of that. Ecosystem is how snowflake fills the gaps in its platform by building the best cloud data platform in the world in terms of collaborations, security, governance, developer friendliness, machine intelligence, et cetera. Snowflake believes and plans to create a de facto standard in our view in data platforms. Get your data into the data cloud and all these native capabilities will be available to you. Now, is that a walled garden? Some might say it is, it's an interesting question. And it's a moving target. It's definitely proprietary in the sense that snowflake is building something that is highly differentiable and is building a moat around it. But the more open snowflake can make its platform, the more open source it uses, the more developer friendly and the greater likelihood people will gravitate towards snowflake. Now, my new friend, Jamak Tagani, she's the creator of the data mesh concept. She might bristle at this narrative in favor of a more open source version of what snowflake is trying to build. But practically speaking, I think she'd recognize that we're a long ways off from that. And I also think that the benefits of a platform that despite requiring data to be inside of the data cloud can distribute data globally, enable facile, governed and computational data sharing and to a large degree be a self-service platform for data product builders. So this is how we see the snowflake data cloud vision evolving. Question is edge part of that vision on the right hand side. Well, again, we think that is going to be a future challenge where the ecosystem is going to have to come to play to fill those gaps. If snowflake can tap the edge, it'll bring even more clarity as to how it can expand into what we believe is a massive $200 billion TAM. Okay, let's close on next week's snowflake summit in Las Vegas. theCUBE is very excited to be there. I'll be hosting with Lisa Martin and we'll have Frank Slutman on as well as Christian Kleinerman and several other snowflake experts. Analysts are going to be there, customers and we're going to have a number of ecosystem partners on as well. Here's what we'll be looking for. At least some of the things. Evidence that our view of snowflakes data cloud is actually taking shape and evolving in the way that we showed on the previous chart where we also want to figure out where snowflake is with its Streamlet acquisition. Remember Streamlet is a data science play and an expansion into Databricks territory. Databricks and snowflake have been going at it for a while. Streamlet brings an open source Python library and machine learning and it's kind of developer friendly data science environment. We also expect to hear some discussion, hopefully a lot of discussion about developers. Snowflake has a dedicated developer conference in November so we expect to hear more about that and how it's going to be leveraging, further leveraging Snowpark which it has previously announced including a public preview of programming for unstructured data and data monetization along the lines of what we suggested earlier. That is building data products that have the bells and whistles of native snowflake and can be directly monetized by snowflakes customers. Snowflake's already announced a new workload this past week in security and we'll be watching for others. And finally, what's happening in the all important ecosystem? One of the things we noted when we covered ServiceNow because we use ServiceNow as an example because Frank Slupin and Mike Scarpelli and others DNA were there and they're proving on that. ServiceNow and its post IPO early adult years had a very slow pace in our view. It was often one of our criticism of ecosystem development. You know, ServiceNow, they had some niche SIs like Cloud Sherpa and eventually the big guys came in and began to really lean in and you had some other innovators kind of circling the mothership, some smaller companies but generally we see Slupin emphasizing the ecosystem growth much, much more than when this previous company and that is a fundamental requirement in our view of any cloud or modern cloud company. Now, to paraphrase the crazy man, Steve Ballmer, developers, developers, developers because he screamed it and ranted and ran around the stage and was sweating. Ecosystem, ecosystem, ecosystem equals optionality for developers and that's what they want and that's how we see the current and future state of snowflake. Thanks, today, if you're in Vegas next week, please stop by and say hello at theCUBE. Thanks to my colleague, Stephanie Chan who sometimes helps research breaking analysis topics. Alex Meyersen is on production and today Andrew Frick, Sarah Kinney, Stephen Conti, Anderson Hill, Chuck Alley and the entire team in Palo Alto, including Christian. Sorry, didn't mean to forget you, Christian Ryder. Of course, Kristen Martin and Cheryl Knight, they helped get the word out and Rob Hoef is our EIC over at Silicon Angle. Remember, all these episodes are available as podcasts wherever you listen to search, breaking analysis, podcasts. I publish each week on wikibond.com and siliconangle.com. You can email me directly anytime, david.volante at siliconangle.com. If you got something interesting, I'll respond. If not, I won't or DM me at dvolante or comment on my LinkedIn posts and please do check out etr.ai for the best survey data in the enterprise tech business. This is Dave Vellante for theCUBE Insights powered by ETR. Thanks for watching and we'll see you next week. I hope, if not, we'll see you next time on breaking analysis.