January 23, 2024 | Posted in News
Look no further than Walt Disney (DIS) for reasons why software maker Snowflake (SNOW) has thrived, with SNOW stock jumping 38% in 2023. Like many large U.S. companies, Disney’s vaunted theme parks turned to Snowflake when it wanted to modernize its big data strategy.
Disney is a good example of a typical Snowflake customer. The entertainment giant moved away from Teradata (TDC) software installed on computers in its own data centers in Orlando, Fla. Then it moved to a remote cloud computing platform run by Amazon Web Services, part of Amazon.com (AMZN).
Snowflake sells data analytics software that runs on cloud-computing platforms. The company also has evolved into a cloud data-management software provider.
Amazon Web Services is a Snowflake partner. Disney runs Snowflake software on AWS computer servers.
At Snowflake’s 2023 investor day, a Disney executive described how its big data strategy is key.
“Data drives everything that happens at Disney parks,” said Rob Smedley, vice president of technology for the company’s parks division. “Every decision in the business is powered by data. So just day-to-day running of the business for sure is coming out of Snowflake. Snowflake is kind of the core of what we designed.”
The global parks and resorts business includes Disney Cruise Line, Disney Vacation Club, Adventures by Disney as well as the consumer products business — Disney online and physical stores.
Snowflake customers can share data with their partners across multiple online storage systems using the company’s data warehouse. In addition, the company enables applications to easily share searchable data.
Like many companies, Disney also is evaluating generative artificial intelligence. Further, SNOW stock analysts expect gen AI to drive more demand for Snowflake’s data-management software.
Key to the rise of gen AI are large language models. With LLMs, users can interact with AI systems without the need for understanding or writing algorithms. The models process “prompts,” such as an internet search query, that describe what a user wants to get.
Gen AI technologies create text, images, video and computer programming code. Companies are racing to develop customized artificial intelligence for specific industries using their own proprietary data to train AI models.
“We’re absolutely looking at gen AI and hope to be a leader in that space,” Smedley said. “But first, focus on the data. We’re going to hit a wall really, really quick if we don’t first focus on the data. If you don’t invest now or you haven’t already started to invest in cleaning up the data, you have no chance. And every day that you wait, you’re going to get farther and farther behind in that race.”
On Amazon’s cloud platform, Snowflake’s software works with LLMs from Anthropic, Hugging Face and a number of others. Also, customers can use OpenAI’s foundation models at Microsoft (MSFT), another cloud partner of Snowflake.
“If you want to get the benefits of generative AI, you’re not going to do that (on premises), you’re going to do it in the cloud,” Snowflake’s Chief Financial Officer Michael Scarpelli said at a Barclays conference last month.
“And in order to get good results out of your large language models, you have to make sure you have clean data you’re running it on,” Scarpelli went on to say. “We think Snowflake is the ideal place for that to be done. Will it be the only place? Absolutely not. But we think it will be a prime choice for customers.”
A growing rival of Snowflake is privately held Databricks. Both companies have acquired AI startups.
Founded in 2012, Snowflake sits at the forefront of another software technology known as “containers.”
Software containers package building blocks of code and support functions in a way that makes applications easier to develop, deploy commercially and scale up based on demand.
Also, containers also enable customers to utilize cloud computing resources in new ways. And, there’s synergy with gen AI.
“We have a number of customers that want to be able to fine-tune their large language models on their Snowflake data in Snowflake,” Scarpelli said at the Barclays conference. “Container services will enable it to happen easily in a secure, governed way where you know your data is never leaving Snowflake.”
Snowflake pulled off the largest initial public offering ever by a software company in September 2020, raising $3.4 billion. But SNOW stock swooned in 2022 as analysts questioned its lofty valuation amid decelerating revenue growth.
One overhang on Snowflake stock has been its consumption-based business model. Also, Snowflake ties its revenue to how much data its customers crunch and store.
Under Snowflake’s consumption-based model, customers buy credits upfront, say for $100,000. Customers consume the credits based on actual usage of compute and cloud services.
Customers use up the credits at any cadence over the duration of a contract. Snowflake recognizes product revenue as customers consume the credits. Traditional software-as-a-service companies usually recognize revenue fully when customers sign contracts.
In late 2022, growth began slowing at Amazon and other cloud service providers as customers “optimized” spending. The trend in making cloud spending more efficient impacted Snowflake as well.
Still, Snowflake’s October-quarter revenue climbed 32% to $734.2 million, topping estimates of $713.8 million. Further, for the current quarter ending in January, Snowflake forecasts product revenue in the range of $716 million to $721 million vs. Wall Street estimates of $696 million.
TD Cowen analyst Derrick Wood holds an outperform rating on SNOW stock.
“Snowflake is releasing a considerable amount of new product to market over the next six to nine months, by far its most ever,” Wood said in a recent note to clients. “We think these new services will unlock a significant amount of new workload consumption on SNOW’s platform.
“We think IT spending on custom AI development on private data will be orders higher in magnitude than off-the-shelf co-pilots.” Software companies offer co-pilots to make their programs easier to use.
“SNOW’s positioning to monetize gen AI workloads should be bolstered by the release of container services,” he said.
Follow Reinhardt Krause on X, formerly called Twitter, @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
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