San Francisco, California – Snowflake, a cloud-data storage provider, faces challenges ahead as management projects a slowdown in top-line growth for FY25 along with tighter margins due to increased operating costs. The company recently confronted a significant security breach at the customer level, leading to data leakages from various companies’ Snowflake databases. Although Snowflake’s security was not compromised, the breach could impact new customer acquisition and prompt existing customers to reconsider their use of the platform.
The breach, affecting 160 customers, was detected on May 23, 2024, just after Snowflake’s Q1’25 earnings report. Despite assurances from Snowflake, Mandiant, Google (GOOG, GOOGL), and CrowdStrike (CRWD) that no vulnerabilities were found on the platform, the incident has raised concerns about data security. Notable companies such as Ticketmaster and Advance Auto Parts were among those affected by the breach, highlighting the potential risks associated with relying on cloud storage providers.
As Snowflake navigates the aftermath of the breach, its forecast for FY25 indicates tighter adjusted operating margins and free cash flow, citing increased costs related to GPUs, AI initiatives, and the recent acquisition of TruEra. The company’s approach to integrating TruEra’s AI LLM analysis platform involves additional personnel and capital investments, which may strain operating costs in the future.
Looking ahead, Snowflake’s growth prospects may be dampened by the breach fallout and heightened competition in the cloud-data storage market. While some analysts believe the breach will have minimal impact, others anticipate a more cautious approach from potential customers and potential revenue and margin challenges for Snowflake. The company’s positioning as an acquisition target for infrastructure and AI application firms like Dell Technologies and Hewlett Packard Enterprise could signal a shift in its future direction.
In terms of valuation, concerns surrounding the security incident and evolving market dynamics lead to a bearish outlook on Snowflake. With a SELL recommendation and a price target of $114.47/share at 10.58x FY26 price/sales, the company faces uncertainties in maintaining its competitive edge in a rapidly changing landscape. The aftermath of the breach underscores the importance of data security in cloud storage solutions and highlights the need for constant vigilance and adaptation in the face of evolving cyber threats.
