Snowflake Q2 2025 Earnings: Flaking Away (Rating Downgrade)

Summary:

• Snowflake stock slips 8% after the earnings report, beats top and bottom lines, but premium valuation doesn’t match profitability expectations.
• I downgrade Snowflake to a sell due to high premium valuation at 45x this year’s free cash flow.
• Snowflake’s growth rates are expected to decelerate, profitability metrics moving in the wrong direction, making the stock excessively expensive and difficult to justify.

Investment Thesis

Snowflake (NYSE:SNOW) delivered fiscal Q2 2025 earnings, which saw its stock slip 8% after hours. But details matter.

It wasn’t so much a lack of beats that drove its stock lower because Snowflake not only beat on the top line and the bottom line, but it also revised higher its growth rates for its fiscal year.

The issue is that Snowflake carries a premium valuation, while its profitability profile cannot match investors’ high expectations. More concretely, I charge that investors are paying too high a premium for Snowflake at 45x this year’s free cash flow.

Therefore, I downgrade my rating on Snowflake to a sell.

Rapid Recap

In my previous analysis last month, I said,

Snowflake is a stock that I’ve been openly dismissive of for some time. My rationale here is straightforward. A company can bedazzle its shareholders for some time, but after a while, investors start to become apprehensive and cautious.

Above you can see my impeccable timing. I recognized Snowflake’s unenticing prospects even before its stock started to turn lower. Despite many AI stocks rallying hard, Snowflake is down more than 30%, while the S&P500 is up 20% — more than 50 percentage points of underperformance.

Snowflake’s Near-Term Prospects

Snowflake is a cloud-based data platform that enables businesses to efficiently store, manage, and analyze large amounts of data. It offers tools for data warehousing, computing, and collaboration, making it easier for companies to access and work with their data. Snowflake is an AI company that has every going for it in terms of a compelling narrative.

On a positive take, Snowflake is experiencing solid growth, with product revenue increasing by 30% y/y, while Snowflake also raised its revenue expectations for the full fiscal year. The adoption of new products, particularly those related to AI, is strong, with thousands of customers using these features already.

Despite its growth, Snowflake faces challenges, particularly around profitability and managing customer expectations in a competitive market. The company’s gross margins are stable but could be pressured by future investments in AI and infrastructure.

Plus, Snowflake needs to navigate potential impacts from broader economic conditions and a tough IT environment. The company’s profitability outlook for fiscal 2025 will depend on balancing these investments on the back of decelerating revenue growth from its rapidly expanding product lineup.

Let’s flesh out this backdrop.

Snowflake’s Revenue Growth Rates Are Poised to Decelerate

In my previous analysis, I said:

This is my contention. It’s going to take a while for investors to recognize the facts for what they are. That Snowflake can no longer be counted on for those hyper growth rates, meaning growth rates above 30% CAGR.

The company is undoubtedly growing rapidly, at scale, but so are countless other businesses. Furthermore, Snowflake isn’t even delivering $1 billion in revenues per quarter, and its growth rates for the remainder of fiscal 2025 are already decidedly lower than 30% CAGR.

If investors can’t trust that a business can be counted on for 30% growth rates, investors will start to question the business’ underlying profitability. Not immediately, but slowly, and then suddenly. And Snowflake’s bottom line doesn’t support its valuation. This has been my argument for a while.

SNOW Stock Valuation — 45x Forward Free Cash Flow

This is what I previously stated,

The time when companies had a seemingly unlimited budget in their IT departments has now come and gone. We are now in a new era. IT departments are being forced to make substantial cutbacks, even if the platform is offering essential services. There are prolonged sales cycles and every line of a company’s budget is being questioned in the current macro environment.

I have been arguing for months that a business cannot grow its bottom line at 50%, while its topline is growing at less than 30%. That’s not feasible. You can do it for a few quarters, or even a couple of years. But at some point, you need to reinvest back into your business. And investors know this. And that’s why even as Snowflake makes a clamor about its superior technology, the facts of the matter are that its free cash flow was down 25% y/y, as its adjusted free cash flow margin compressed by 500 basis points y/y, see below.

To drive my point further, all of Snowflake’s profit metrics are showing a company whose profitability is moving in the wrong direction.

Snowflake is sacrificing profits for revenues and chasing growth. Previously, I believed that Snowflake could deliver $1.2 billion of free cash flow in 2025.

Now, I no longer believe that Snowflake will even deliver $1 billion of free cash flow. But let’s go with $1 billion for the sake of our discussion, and note that this would require a particularly strong fiscal H2 2025 period from Snowflake for its free cash flow to go from approximately $430 million to $570 million.

In sum, avoid this name. There are better investments out there with different growth profiles and fewer hairs on them. I’m all up for a bargain. Also own some battleground stocks too, like Meta (META) or GigaCloud Technology (GCT), but I’m mindful of getting in battleground stocks when the expectations are muted.

In the case of Snowflake, it’s a battleground stock with an extended valuation profile. That is not a good setup.

The Bottom Line

In conclusion, paying a 45x free cash flow multiple for Snowflake feels excessively expensive and hard to justify, especially given the company’s current trajectory. While Snowflake has a strong AI-driven narrative, the deceleration in its revenue growth and the ongoing challenges in profitability raise significant concerns.

Snowflake’s gross margins may remain stable for now, but the pressures from future investments and a tougher IT environment are likely to weigh heavily on its financials. Moreover, the company’s profitability metrics are moving in the wrong direction, signaling that it’s sacrificing too much in the pursuit of growth.

At this valuation, the stock simply doesn’t offer a compelling setup, especially when compared to other investments with more balanced growth profiles and less uncertainty.

SNOW is more of a snowball rolling downhill than a snowflake rising to new heights.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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