• Snowflake achieved 29% YoY product revenue growth in Q3 FY2025, raising FY2025 guidance to $3.43 billion.
• New product launches like Cortex and Snowpark, combined with engineering upgrades, drove adoption and $200M in incremental revenue.
• Added 18 Global 2000 clients in Q3, with RPO reaching $5.7 billion, up 55% YoY.
• AWS collaboration generated $3.9 billion in bookings over four quarters, marking a 68% YoY growth.
• Snowflake Cortex’s AI tools are in 1,000+ production use cases, strengthening enterprise workflows and boosting platform stickiness.

Investment Thesis

Since our last overage on Snowflake (NYSE:SNOW), the stock has increased by 40% and despite the bull run the outlook is still favorable with additional upside. Snowflake’s FY2025 guidance revision and 29% YoY product

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.

The post Why Snowflake’s Future Looks Brighter Than Ever appeared first on Up2info.com.

• SNOW has proven that the market’s fears surrounding the tiered storage pricing and the open-source Iceberg Table formats have been overly done.
• The new management continues to deliver excellence with growing product revenues and multi-year RPOs, exemplifying their ability to grow adoptions while cross selling to its existing consumer base.
• Even so, we are uncertain if SNOW’s renewed growth cadence deserves the eye-watering FWD P/E non-GAAP valuations of 246.39x, compared to the sector median of 25.80x.
• SNOW’s decelerating growth trend continues to imply its inability to directly compete with Databricks as well, which has reported +60% YoY growth in H1’25.
• Barring an acceleration in SNOW’s adj EPS growths in the triple digits, we believe that the eventual selling pressure is likely to be painful once buying momentum ends.

SNOW’s Rally Has Been Overly Fast & Furious – Expensive Valuations Offer Minimal Margin Of Safety

We previously covered Snowflake (NYSE:SNOW) in October 2024, discussing the stock’s ongoing meltdown, attributed to the decelerating topline growth trend and impacted profit margins, as the management intensified their AI growth efforts.

Combined with the elevated SBC expenses, expensive valuations, and lack of bullish support, we had believed that the stock was likely to further trend downwards before growth materialized and a bottom was found.

SNOW YTD Stock Price

Since then, SNOW has mostly traded sideways before charting an eye-watering rally by +36.2% after the double beat FQ3’25 earnings call in late November 2024 – an uptrend similarly observed in numerous generative AI SaaS stocks in varying degrees.

Part of the optimism may be attributed to the “strong structural AI-related demand” across the infrastructure and SaaS layer, as similarly reported by numerous players, particularly Nvidia (NVDA) and Taiwan Semiconductor Manufacturing Company (TSM), along with Palantir (PLTR) and AppLovin (APP).

These developments have also been observed in SNOW’s FQ3’25 earning results, with product revenues of $900.3M (+8.5% QoQ/ +28.8% YoY), adj operating margins of 6.5% (+1.3% QoQ/ -3.7% YoY), and adj EPS of $0.20 (+5.2% QoQ/ -20% YoY).

This is on top of the robust growth observed in its multi-year remaining performance obligation of $5.7B (+9.6% QoQ/ +54% YoY), with it exemplifying the management’s ability to increasingly cross sell to an existing consumer base while growing new adoptions.

It is apparent from these developments that SNOW’s introduction of tiered storage pricing in FQ4’24 and the increased adoption of the open-source Iceberg Table formats have not been growth headwinds indeed, with it implying that the stock’s meltdown after the FQ4’24 earnings call may have been overly done.

If anything, the management has reported “minimal headwinds from customers moving to Iceberg,” partly aided by the growing demand for its data engineering features, with it well balancing the “potential loss of storage revenue,” as observed in the robust FQ3’25 numbers above.

SNOW’s ability to generate growth through acquisitions has been impressive indeed, especially given the relatively healthy balance sheet with a net cash position of $1.88B (-41.6% QoQ/ -46.8% YoY) after the three acquisitions completed in 2024 (price undisclosed).

This is on top of its strategic partnerships with numerous hyperscalers along with AI start ups, allowing the company to increasingly grow its bookings and LLM offerings through the Snowflake Cortex AI, with over 3.2K accounts already utilizing its AI features (+28% QoQ) and over 1K deployed AI use cases.

It appears that the aggressive acquisition sprees have also been accretive to its top-lines, as observed in SNOW’s raised FY2025 revenue guidance to $3.43B (+28.9% YoY) compared to the original guidance of $3.25B (+22.1% YoY) offered in the FQ4’24 earnings call.

This is despite the dilutive impact on the SaaS company’s bottom-lines, based on the impacted FY2025 adj operating margins guidance of 5% (-3 points YoY), compared to the original guidance of 6% (-2 points YoY).

The Consensus Forward Estimates

These developments may also be why the consensus have upgraded their forward estimates, with SNOW expected to generate an accelerated top/ bottom-line growth at a CAGR of +24.5%/ +13.8% through FY2027.

This is compared to the original estimates of +23.3%/ +10.9%, while building upon the robust top-line growth of +80.4% observed between FY2020 and FY2024.

SNOW Valuations

Even so, we are uncertain if SNOW’s renewed growth cadence deserves the eye-watering FWD P/E non-GAAP valuations of 246.39x, compared to the sector median of 25.80x.

Even when comparing SNOW’s premium FWD PEG non-GAAP ratio of 9.88x to the sector median of 1.94x and its SaaS/ generative AI peers, including Oracle (ORCL) at 2.45x, Microsoft (MSFT) at 2.49x, Adobe (ADBE) at 1.61x, AppLovin (APP) at 2.61x, and Salesforce (CRM) at 2.12x – the former’s expensive valuations offer interested investors with a minimal margin of safety.

If anything, with SNOW’s frothy valuations nearing those of Palantir (PLTR) at FWD P/E non-GAAP valuations of 175.34x and FWD PEG non-GAAP ratio of 6.37x, it appears that we are potentially entering a new AI bubble stage with these stocks no longer trading based on fundamentals in our opinion.

Lastly, SNOW’s decelerating growth trend continues to imply its inability to directly compete with Databricks. For reference, Databricks has reported over +50% YoY growth in its FY2024 revenues to over $1.6B, with the management guiding for an acceleration in its growth prospects to over +60% YoY by H1’FY2025 (H1’CY2024) at $2.4B.

With SNOW expected to generate a decelerating top/ bottom-line growth at low double digits, we believe that the stock’s painful correction may only be a matter of time.

So, Is SNOW Stock A Buy, Sell, or Hold?

SNOW 3Y Stock Price

For now, SNOW has broken through numerous resistance levels while running away from its 50/ 100/ 200 day moving averages, with the stock appearing to be well supported at current levels in the $170s.

The combination of inflated valuations and sky-high stock prices continue to imply that the stock is currently buoyed by momentum instead of fundamentals, with it remaining to be seen when buying momentum may end.

If anything, we believe the stock market has also entered greedy territory, with it potentially contributing to the market’s over exuberant sentiments and numerous generative AI/ SaaS stocks’ premium valuations after the promising Q3’24 earning season, SNOW included.

This is also why we believe that the stock does not offer interested investors with a compelling investment thesis, especially given the overly expensive FY2027 P/E non-GAAP valuations of 122x, based on the stock prices of $175.94 at the time of writing and the consensus FY2027 adj EPS estimates of $1.44.

As a result, we prefer to downgrade our Hold rating to a Sell instead. Take your gains here.

Risk Warning

Author’s Historical Rating

As observed in our historical rating for PLTR, it is impossible to time the market indeed, with the stock seemingly well supported by retail investors while consistently charting new heights despite our two Sell ratings.

The same may occur for SNOW as well, with our Sell rating potentially coming too early and investors taking their gains prematurely before the stock price reversal comes.

Even then, barring an acceleration in SNOW’s adj EPS growth in the triple digits, we believe that the current premium valuations are unwarranted, with the eventual selling pressure likely to be painful once buying momentum ends.

While SNOW may continue to offer a compelling SaaS investing story and robust bullish support, as most recent investors also enjoy rich capital appreciation (assuming Q3’24 entry points at between $100s to $120s), it is undeniable that there remains a minimal margin of safety at current levels – resulting in our Sell rating upon the exhaustion of the stock’s current upward momentum.

Do not chase overpriced stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NVDA, TSM either through stock ownership, options, or other derivatives. 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.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

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.

The post Snowflake: Valuations Buoyed By Momentum, Not Fundamentals – Downgrade To Sell appeared first on Up2info.com.

• Snowflake’s recent earnings beat and AI advancements have likely stunned pessimistic investors.
• Its attempt to catch up with its peers has paid off. While the post-earnings surge is remarkable, can it continue to outperform from here?
• SNOW’s forward adjusted PEG ratio of almost 10 underscores the extremely bullish proposition baked into its valuation.
• I explain why betting on SNOW’s outperformance hasn’t paid off when compared to a broader set of software peers.
• Investors who are considering risking capital on SNOW must reassess whether it makes sense to buy a stock valued at a forward P/E of more than 200x.

Snowflake: “Triple” Beat Assured Investors

Snowflake Inc. (NYSE:SNOW) investors have enjoyed a remarkable recovery as the stock of the data cloud company surged after its recent earnings scorecard. Accordingly, SNOW has recovered to levels last seen in May 2024, as investors lost confidence in its ability to execute well against its AI rivals, affecting its operating performance. In my previous Snowflake article, I downgraded the stock as I assessed increased execution risks, given its highly demanding valuation metrics. However, my cautious assessment has not panned out, as SNOW has outperformed the market markedly since then. What has spurred the return of buying sentiments recently that lifted its outperformance against the market?

In Snowflake’s fiscal third-quarter earnings release, the data lake and data warehouse company regained the market’s confidence. Accordingly, SNOW managed a “triple-beat,” outperforming Wall Street’s estimates on revenue and adjusted EPS. The company also trumped analysts’ forward guidance as Snowflake seeks to regain the mojo with investors. Therefore, its recent resurgence is justified, suggesting the market was too pessimistic previously.

Snowflake Making Gains In AI To Catch Up

I assess that Snowflake has demonstrated its resolve to catch up with its AI-centric peers in the rapidly evolving Generative AI landscape. The company strengthened its partnership with Anthropic, integrating Claude LLMs into Snowflake’s data cloud. I assess that it has corroborated Snowflake’s multi-cloud capabilities while augmenting its Agentic AI growth prospects through the partnership.

In addition, the company also acquired Datavole, underscoring the “strategic” nature of the deal. Hence, Snowflake has astutely capitalized on the improved market confidence in AI monetization as the “next phase” of AI takes center stage. Moreover, Snowflake’s multi-cloud ecosystem has afforded the company to leverage on AI hyperscaler growth momentum through AWS (AMZN) and Microsoft Azure (MSFT) while furthering its data integration with leading enterprise SaaS company ServiceNow (NOW). Hence, these improvements should position Snowflake more effectively as it aims to compete against data analytics arch rivals such as Databricks.

I assess that SNOW’s revised go-to-market strategy under the leadership of CEO Sridhar Ramaswamy seems to have paid off, given the recent stock recovery. The company has consolidated its more profitable projects while focusing more intensely on cutting costs. Management underscored the company’s “more rigorous approach to cost management.” It has also accelerated its product improvements and launches to justify its aggressive growth premium. Therefore, it should help mitigate the market’s concerns about its competitiveness with Databricks as Snowflake bolsters its AI capabilities.

Snowflake Needs To Accelerate Operating Leverage

Wall Street’s estimates on Snowflake have been upgraded, corroborating the market’s confidence in Snowflake’s revamped AI strategy. Therefore, investors have demonstrated their support for management’s updated guidance for FY2025.

Notably, Snowflake sees improved adoption for its growth solutions (Snowpark, Cortex AI), critical to underpinning its operating leverage gains moving ahead. As a result, Snowflake’s profitability growth could accelerate through FY2027, even as revenue growth is expected to decelerate further. Its solid execution in FQ3 has validated the changes made to Snowflake’s business model. Investors have likely reflected higher confidence in the company’s ability to accelerate its growth momentum from here, although questions must still be asked about its highly expensive valuation.

SNOW: Valuation Is “Absurdly” High

SNOW’s “F” valuation grade suggests that much optimism is reflected in its bullish thesis. While I’m not bearish on its ability to recover from its malaise, I believe caution is still appropriate. Snowflake’s unique positioning as a multi-cloud provider with its data cloud has regained traction, as seen with the recent achievements with AWS, ServiceNow, and Microsoft Azure. Also, the company has strengthened its focus on AI with the CEO change. It has also accelerated its product iteration to compete more effectively with its arch-rivals.

Despite that, it’s also increasingly clear that the market expects Snowflake to justify a more significant improvement in operating leverage, given that topline growth is expected to slow. While the company’s net revenue retention rate has stabilized at 127% in the recently reported fiscal quarter, it remains well below the 135% metric achieved in the previous year. Moreover, the volatility in its revenue recognition due to its consumption-based pricing model must also be considered. Although the pricing model is increasingly relevant as AI costs are expected to increase, an unanticipated slowdown in consumption could hamper the market’s confidence in its ability to monetize AI.

As a result, I find it challenging to justify SNOW’s forward-adjusted PEG ratio of almost 10, well over its tech sector (XLK) median of 1.88.

Is SNOW Stock A Buy, Sell, Or Hold?

As seen above, the price chart of SNOW/IGV doesn’t lie. While I wouldn’t consider Snowflake a typical “software” stock, analysts have juxtaposed their assessment with other leading analytics software platform companies. Hence, it might be appropriate for investors also to consider SNOW’s performance relative to its SaaS peers represented in the iShares Expanded Tech-Software Sect ETF (IGV).

As seen above, the structural downtrend in SNOW/IGV is unmistakable. The series of lower-highs and lower-lows price structures have beset SNOW/IGV over the past few years. While mean-reversion opportunities (upward arrows in the chart) have occurred from time to time, the structural downtrend bias has consistently reasserted itself over time.

IGV is assessed at a forward P/E valuation of 33.8x, well below SNOW’s 248x. Therefore, I cannot conjure feelings of optimism on the stock, notwithstanding its recent outperformance. I also beseech bullish investors to reassess why they think Snowflake can continue to outperform expectations, given the level of bullishness already baked into the stock. Unless management can afford a much more robust forward outlook for FY2026, SNOW’s relative underperformance against IGV seems likely to continue.

Rating: Maintain Hold.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

I Want To Hear From You

Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMZN, MSFT, NOW, IGV either through stock ownership, options, or other derivatives. 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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• Snowflake Inc.’s stock surged post-FQ3 earnings but remains overvalued based on limited AI revenue and decelerating growth.
• The company is only targeting 23% YoY growth in FQ4 despite the investor excitement.
• The stock’s rally is driven by AI hype and multiple expansions, pushing the valuation similar to pre-IPO Databricks with up to double the growth rates.
• Investors should consider cashing out of Snowflake due to downside risks on a stock trading at 15x FY26 revenues, especially as Snowflake’s growth continues to point to decelerating.

After a rough patch that saw Snowflake, Inc. (NYSE:SNOW) shares collapse over 50% from the yearly highs, investors came rushing back into the stock following a promising FQ3 earnings report. The AI data company highlighted some bright spots in the quarter to overcome past issues with data security. My investment thesis remains Bearish on the stock after the big rally back up to $175 and the related rich valuation.

Deceleration Hasn’t Ended

Snowflake soared following the strong FQ3 earnings where the company smashed analyst estimates last week as follows:

The AI data company beat revenue estimates by a massive $44 million. The problem here is that Snowflake only guided product revenue growing sequentially from $900 million to $906 to $911 million in FQ4 after growing by $71 million over the FQ2 level.

The big beat naturally makes investors think the AI revolution has started and Snowflake will return to massive growth. The reality is that guidance isn’t supportive of such growth, with key product revenue only targeted at 23% growth YoY in FQ4, due in small part to the slower holiday season.

While the stock has shot up due to AI hype, the company downplayed the AI revenue contribution with AI products including Cortex, Document AI and Snowpark Container Services producing limited revenues.

On the FQ3 earnings call, CFO Mike Scarpelli discussed this dynamic with AI still a fraction of the business as follows (emphasis added):

We are seeing an uptick in new products. I would say Cortex is starting to take off. It’s still very much in the early innings, and we are very optimistic of what that’s going to do in the future based upon what we’re seeing and Snowpark continues to track as expected, will be 3% of our revenue for the year and growing very nicely year-over-year.

The general industry is starting to focus more on RPOs from billing, with Snowflake showing a massive boost in RPOs from the prior FQ3 levels. RPOs jumped over 55% to $5.7 billion in FQ3 from only $3.7 billion last October quarter.

Again, the devil is always in the details. Snowflake saw a massive boost in RPOs back in FQ4 ’24 when the current RPO value dipped from 57% of total RPOs to only 50% due to an extension in the contract commitments of bigger customers.

Since the start of FY25, Snowflake has only grown RPOs from $5.175 billion to $5.732 billion for only 11% growth over the three-quarter period after the big boost during the last FQ4. As an example, one major customer signed a 5-year deal for $250 million in commitments in a sign of how some large new contracts are extended way beyond a period of a couple of years.

Priced Like A Pre-IPO Stock

The stock has rallied due to multiple expansion, not any real change in the financial picture of the company. Snowflake now trades at 16x forward sales expectations, versus closer to 10x at the lows.

The stock has a market cap of nearly $64 billion based on a fully diluted share count of 364 million. The company has spent $1.9 billion this FY to repurchase shares. However, Snowflake would best served waiting for better valuations to utilize its cash, especially after issuing $2.3 billion worth of convertible debt stuck on the balance sheet now, contributing up to 20 million shares in the diluted share count.

The numbers definitely suggest Snowflake might sneak by mostly unscathed from the data security issues. Though, some guidance does question whether some customers in the pipeline haven’t somewhat delayed implementations, with sales growth again targeted to slip substantially in FQ4.

Overall, Snowflake guided to FQ4 product revenues of $908.5 million at the midpoint. Assuming $40+ million in other revenues, the company is forecasting sales for the January quarter in the $950 million range, with the consensus analyst estimates up at $955.5 million for 23% growth overall.

So despite the big beat, analysts haven’t increased FY26 revenue growth beyond the FQ4 rate of 23%. The stock isn’t priced for this growth rate at nearly 15x forward sales targets of $4.4 billion.

Databricks apparently is being valued at $55 billion in a new funding round, raising at least $5 billion in capital to challenge Snowflake. The other major AI data company was expected to reach $2.4 billion in annualized revenues this year and is likely a major contributor to why Snowflake has seen growth rates decelerate this year, outside the data security issues.

While Databricks could get a valuation at over 20x current sales, the business would trade at only 15x forward sales assuming sales in the range of $3.6 billion in 2025 based on a 50%+ growth rate. The private AI data company would have much faster growth rates than Snowflake.

As a reminder, Snowflake went public for over $200 and quickly rallied to nearly $400 within months and eventually collapsed to a low of nearly $100 this year. If the stock currently trades at close to the valuation multiple of a pre-IPO company, Snowflake is likely vastly overvalued based on the public market history of the stock and current growth rates.

Takeaway

The key investor takeaway is that Snowflake is back to trading based on AI hype, while the company is actually reporting limited related revenues. Investors should use the current strength to cash out due to the downside risk, with the AI data company likely to report decelerating growth outside another massive sales beat that appears highly unlikely.

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.

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The post Snowflake: AI Evolution Overplayed appeared first on Up2info.com.

• Snowflake Inc.’s shares have been in the penalty box over the year, but the publication of Q3 earnings changed the picture.
• The company’s core data warehousing business and emerging products like Snowpark, Cortex AI, and Iceberg tables are gaining traction, driving future growth.
• Despite the 30% post-earnings surge, SNOW’s shares trade discounted compared to some high-growth SaaS peers, indicating room for further upside.

Introduction and investment thesis

Making a profit by investing in Snowflake Inc.’s (NYSE:SNOW) shares could have seemed a fool’s errand over the year for most investors. The share price has halved from its ~$235 February peak at the beginning of September as the company kept posting disappointing quarterly earnings. Meanwhile, key competitor Databricks surprised the investing community with robust fundamentals.

Despite a slower-than-expected turnaround and the continuously dropping share price, I kept my bullish stance. My view has been supported by the quick pace of new product launches, the long-awaited stabilization of the core business, strong bookings, the change in the company’s sales compensation plan, and the seemingly conservative management guidance for the year. At the beginning of July, I thought all the bad news was out, and the share price should begin to recover (Snowflake: Fool Me Once, Fool Me Twice). However, the publication of FY25 Q1 earnings delivered another setback.

This has been followed by a still soft FY25 Q2 earnings print, where I believe many investors lost their faith that a material turnaround will happen anytime soon. I’ve called this phase peak pessimism (Snowflake: Peak Pessimism) and came away with the conclusion that the risk/reward of investing in Snowflake’s shares hasn’t been so attractive for a long time: another mediocre earnings print wouldn’t do much additional damage, but a positive turnaround could ignite a relief rally.

I think this is precisely what happened after the publication of FY25 Q3 earnings, when shares gained more than 30% following the release. And all this, with just a slightly larger beat than usual combined with stronger guidance and a nicely increasing backlog, but nothing really extreme.

Improving numbers and positive management commentary could have raised expectations going forward, but at current valuation levels, I think shares are still a good investment. However, no more hiccups are allowed from this point.

Q3 earnings: Finally, a positive surprise

Snowflake reported revenues of $942 million for the recently closed FY25 Q3 quarter, beating the average analyst estimate by almost 5%. This has been the second largest beat over the past two years, signaling confidence of a looming turnaround:

Last time the company reported a similar beat, it was accompanied by a surprisingly soft forward guidance. Luckily, this hasn’t been the case this time as management guided for product revenue of $906-$911 million for Q4 (equaling ~$988 million total revenue), 2% above the $891 million analyst estimate. Assuming a 4% beat for the upcoming quarter, this would result in a YOY total revenue growth rate of 27.6% close to this quarter’s 28.3%:

Although we are still not talking about a re-accelerating top line growth rate, the stabilization of top line growth is visible. The main driver behind this has been the improvement in the company’s core data warehousing business, which is reflected in the stabilization of Snowflake’s net retention rate at 127%:

The company’s data warehousing business is strongly linked to the transition of enterprises to the cloud. As evidenced by the recent earnings prints of large cloud providers, the negative impact of cloud cost optimization continues to recede, providing important fundamental momentum for many SaaS companies.

On top of that, Snowflake’s emerging product lineup continues to gain traction. Snowpark (Snowflake’s own development framework) is on track to reach 3% of product revenues for FY25, while Cortex AI (managed service for building AI apps easily), dynamic tables (helps customers simplify data engineering processes), and notebooks (creating data science and ML workloads) are on track to go down the same path. Currently, more than 3,200 accounts use some of Snowflake’s ML or AI features with more than 1,000 different deployed use cases, which could be further strengthened by the inclusion of Anthropic’s models in Snowflake’s data platform.

The recent introduction of Iceberg tables should also be a critical driver of revenue growth re-acceleration, especially in FY26. This functionality, currently used by ~500 accounts, allows customers to run Snowflake on data that resides outside the platform, increasing the company’s reach by several times. On the flip side, this could result in customers moving their data out of Snowflake’s storage, but the negative impact of this has been minimal for now.

Finally, the share of data-sharing customers continued to increase in Q3 combined with an uptick in marketplace listings leading to further strengthening collaboration within the snowflake ecosystem:

Looking ahead, Snowflake reported a significant increase in its backlog, which bodes well for the upcoming quarters. Remaining performance obligations (RPO) reached $5.7 billion, growing ~$0.5 billion from the prior quarter, recording a 55% YOY increase:

The strong YOY growth rate hasn’t been the result of unusually large long-term commitments over the quarter, as the company’s cRPO figure has also increased nicely to ~$2.8-$2.9 billion:

This has been a ~36% YOY increase after ~30% over the previous quarters. I believe, this shows that Snowflake’s new products are gaining traction, which should translate into reported revenue figures soon.

Besides encouraging top line growth trends, Snowflake also managed to improve its bottom line over the Q3 quarter, which has been an increasingly important concern for investors. While non-GAAP gross margin stabilized at 76%, non-GAAP operating margin increased to 6% from 5% in Q2 thanks to more rigorous cost management (e.g., removing redundant management layers). However, this wasn’t enough to increase margins YOY, as the company has been investing heavily in future growth:

2024 has been a year of heavy spending for Snowflake, partially resulting from increasing expenses for renting GPU capacity, not to mention YTD headcount growth of more than 11%. As these investments pay off next year and expense growth moderates, margins should continue to widen in my opinion. The first step in this process could have been evidenced this quarter.

Valuation still lagging peers

Although the valuation of Snowflake’s share increased significantly after the +30% post-earnings surge, they’re still trading discounted compared to high-growth SaaS peers:

The shares of Snowflake trade at a forward Price/Sales ratio of ~16, while companies with similar fundamentals measured by the Rule of 40 metric trade significantly higher. Snowflake is projected to close FY25 as a Rule of 52 company, similar to ServiceNow (NOW) (Rule of 53) or Datadog (DDOG) (Rule of 55). However, these two companies trade at a forward P/S ratio of ~20 at a 20%+ premium compared to Snowflake. On top of that, there is CrowdStrike (CRWD) with a P/S ratio of 23 combined with a Rule of ~60 metric, which is surrounded by uncertainties resulting from the global outage.

Based on this comparison, I believe there is still too much pessimism baked into the valuation of Snowflake’s shares, leaving room for further outperformance among high-growth SaaS companies.

Conclusion

Snowflake managed to positively surprise investors with its Q3 earnings print after a series of disappointing news, leading to a relief rally in shares. The valuation shows that investors are still questioning whether the company can regain its former glory, which leaves room for further upside in case the fundamental turnaround takes hold. I believe that the stabilization of the company’s core business accompanied by several emerging growth drivers will take care of this sooner than later.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SNOW either through stock ownership, options, or other derivatives. 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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• Snowflake’s stock struggled earlier in the year due to disappointing FY 2025 guidance and CEO Frank Slootman’s retirement.
• New CEO Sridhar Ramaswamy’s AI expertise aims to close the gap with Databricks and achieve Snowflake’s ambitious $10 billion revenue goal by FY 2029.
• Snowflake Cortex enhances data workflows with AI but lacks the advanced functionality of Databricks Mosaic AI, necessitating further investment in AI capabilities.
• A strategic partnership with Anthropic aims to integrate advanced LLMs, enhancing Snowflake’s AI offerings and potentially driving significant ROI for customers.

When I wrote about Snowflake (NYSE:SNOW) in early March this year, I discussed why the stock had dropped from its highs after reporting its fourth-quarter fiscal 2024 earnings on February 28, 2024. Those reasons included disappointing earnings results

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SNOW either through stock ownership, options, or other derivatives. 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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• Snowflake Inc.’s sales growth slowed to 28%, with adjusted operating margin dropping to 6.25%, prompting a focus on cost management and go-to-market strategy to boost growth.
• Despite AI/ML feature expansions and strategic partnerships, Snowflake’s functionality lags competitive CSPs that offer more robust AI & analytics capabilities.
• Snowflake is facing a migration out of its storage service as customers adopt Iceberg, or the ability to leverage external data sources on Snowflake’s platform.

seekingalpha.com/symbol/SNOW/balance-sheet

Snowflake Inc. (NYSE:SNOW) reported a mixed Q3 ’25 earnings result on November 20, 2024, as sales growth moderated to 28% with the adjusted operating margin declining to 6.25%, down from 9.80% in Q3 ’24. Despite the headwinds faced in the last few quarters, management is taking the initiative to manage down costs & operating expenses while bolstering its go-to-market strategy in an attempt to accelerate top-line growth.

Given the potential headwinds faced as a result of Snowflake’s slow adoption of AI capabilities, I have reason to believe that the firm may be in a continuous state of playing catch-up to its competitors through acquisitions. This could potentially result in less durable revenue and tighter operating margins going forward. Given these factors, I am reiterating my SELL rating with a price target of $136/share at 11x eFY26 price/sales.

Be sure to review my previous coverage of Snowflake here:

Snowflake’s Decline May Not Be Over.

Snowflake Operations

Management is taking action to improve Snowflake’s operations through flattening the corporate structure by eliminating redundant management layers to drive faster decision-making and shorten the time to deployment of AI features. Management is also making major changes to its product features by removing underperforming applications to better align to the overall product portfolio with the intent of improving operating margins.

Snowflake is hitting the ground in expanding its AI footprint by expanding its ecosystem for developers. In q3’25, Snowflake deployed over 1,000 use cases in its AI/ML products for customers to leverage. The firm is also improving its data operability to allow for broader use cases for customers through its partnership with Microsoft (MSFT) and ServiceNow (NOW).

In Q3 ’25, Snowflake launched Unistore and Snowflake Open Catalog, among others, to expand customers’ development abilities on the platform. Unistore was designed to simplify and unify transactional and analytical data onto one platform. Open Catalog broadens Snowflake’s reach in open data formats with Apache Iceberg based on Apache Polaris. Snowflake also expanded its Cortex AI offering by partnering with Anthropic to roll in more powerful and complex models.

Management noted in the Q3 ’25 earnings call that customer adoption of Cortex is ramping up. Cortex was launched towards the end of 2023 as a fully managed service that provides customers access to AI/LLM models and includes Snowflake Copilot and Universal Search. The product was designed to be serverless, meaning that all functionality is performed in the cloud.

In q3’25, Snowflake had 500 accounts adopting Iceberg. Management anticipates that contributions from its data engineering features will offset the potential loss of storage revenue going forward. Accordingly, storage remains 11% of Snowflake’s consumption revenue. As a result of the strong data engineering product offerings, Snowflake signed $350mm+ in total contract value deals in Q3 ’25 and expects this momentum to continue going into the close of the fiscal year.

In Q3 ’25, Snowflake announced its intent to acquire Datavolo, a data pipeline management company. Datavolo will bring ETL functionality to Snowflake’s offerings, allowing for customers to leverage applications data for analytics and AI modeling. Datavolo uses Apache NiFi for automating data flows between enterprise data sources for GenAI applications. The intent of the acquisition was to broaden Snowflake’s exposure to the data lifecycle captured to simplify the process and improve the cost structure for customers.

As part of their growth initiative, management is focused on improving their go-to-market strategy by expanding the sales staff. Much of the drive will be in identifying and bringing new workloads into production and bringing these features to the market. This, in part, should help offset any headwinds created by the decline in storage services. This can also create an opportunity for Snowflake by providing customers with a more robust data analytics platform to analyze existing structured and unstructured data stored with Snowflake. Bridging the gap is Iceberg, which allows customers to leverage Snowflake’s analytics platform with external data sources.

One analyst on the Q3 ’25 earnings call raised concerns relating to the two top-10 customers that have yet to renew their long-term contracts, managing their instances on a month-to-month basis. In Q2 ’25, management noted that these two customers can continue to pay on a monthly basis through the end of the year. Accordingly, top-10 customers add $40-50mm in RPO and the two customers are not included in the firm’s measurement.

Snowflake Financial Position

Snowflake reported a 29% year-over-year increase in net revenue for q3’25 to $900mm paired with a decline in adjusted gross margin of 72.94%, down -196bps from the previous year. Adjusted operating margin also declined to 6.25% in Q3 ’25, down from 9.80% in Q3 ’24. Snowflake’s “Rule of 40” came in at 34.57% in Q3 ’25, improving sequentially from 33.94% but declined on a year-over-year basis from 41.60%. I define “Rule of 40” as the sum of year-over-year revenue growth and adjusted operating margin.

Looking ahead to Q4 ’25, I’m forecasting Snowflake to generate $951mm in net revenue, a 23% increase on a year-over-year basis, with an adjusted operating margin of $42mm for a “Rule of 40” at 27.17%. I’m forecasting adjusted EPS to come in at $0.14/share for Q4 ’25.

In Q3 ’25, Snowflake issued $1.15b in 2027 0% convertible senior notes and $1.15b in 2029 0% convertible senior notes. Proceeds from the issuances were used to pay for the capped calls and share repurchases. The remaining cash from the issuances will be utilized to repurchase shares, engage in M&A activity, and to finance operations. As of q3’25, Snowflake had $4b in cash & equivalent and $2.2b in convertible senior notes on the balance sheet.

Risks Related To Snowflake

Overall, I believe Snowflake is in a good financial position; however, my biggest concern is that Snowflake may not be able to maintain its high level of growth as other data storage and engineering platforms outpace Snowflake in AI-related capabilities. Companies like Databricks are said to provide users with more advanced AI capabilities at a lower cost of consumption.

Bull Case

Snowflake is scaling beyond its traditional data storage and BI capabilities with additional AI/ML features, allowing for customers to better leverage their existing data for new AI applications. Snowflake is making the platform more accessible by allowing external data sources. Though Snowflake’s AI development capabilities are not as advanced as competing cloud storage and data engineering platforms, the software is user-friendly and allows for robust data analytics for business intelligence needs.

Bear Case

Despite the robust analytics capabilities, Snowflake may be limited on its AI/ML functionality, leading customers to potentially consider other cloud platforms for a unified, universal platform. Given the acceleration of interest in AI applications beyond GenAI by enterprises, it is likely that Snowflake will be playing catch-up to provide the capabilities necessary for builders to develop their applications on the platform. This may result in both customer churn and narrower operating margins as a result.

Valuation & Shareholder Value

SNOW shares currently trade at 17.76x trailing twelve-month price/sales, a significant premium over its peer average of 8.25x. I do not believe that this high valuation is justified given the potential headwinds Snowflake may face as more enterprises seek to go beyond business intelligence by implementing more advanced AI capabilities for business optimization.

Snowflake has repurchased $1.9b in shares year-to-date and has $2b remaining under its March 2027 share repurchase authorization.

Using an internal valuation model based on my eFY26 sales forecast and the stock’s historical trading valuation, I have reason to believe that SNOW shares may be overvalued after the large +30% price run-up post-q3 ’25 earnings.

On average, SNOW shares should trade at around the $160/share price at 13x eFY26 price/sales. Given the potential headwinds in place in my risk analysis, I believe SNOW shares may fall back to my gray-sky scenario of eFY26 11x price/sales at $136/share. I am reiterating my SELL rating for SNOW.

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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• Snowflake’s Q3 earnings exceeded expectations, with $0.20 adjusted EPS and $942M in revenue, driving a 33% stock surge on Thursday.
• Strong customer acquisition, near-30% top line growth and an increase in FY 2025 revenue guidance affirm Snowflake’s growth potential.
• Snowflake’s free cash flow margin improved sequentially, and the platform generated a solid $78.2M in FCF in Q3.
• The company’s valuation at a 13.0X price-to-revenue ratio remains justified by its robust double-digit growth trajectory.

Shares of Snowflake (NYSE:SNOW) surged 33% on Thursday, the day after the cloud-based data company reported much better than expected third fiscal quarter earnings and raised its outlook for FY 2025. Snowflake is seeing strong customer acquisition momentum which resulted in higher than expected product revenues. Snowflake’s retention rate also remained steady quarter-over-quarter while the company reached more customers in the October quarter than ever before. While Snowflake is not cheap, strong execution and an improved outlook for FY 2025 make shares of the software company a strong buy!

Previous rating

I rated shares of Snowflake a strong buy in August due to the company having very strong free cash flow and good customer retention: The More It Drops, The More I’ll Buy. In the October quarter, Snowflake reported near-30% top line growth, a higher free cash flow margin Q/Q and strong retention yet again. I believe the raised guidance for FY 2025 together with Snowflake’s other achievements in the October quarter continue to make the cloud-based software platform a strong buy for growth investors.

Snowflake’s Q3’24

The cloud-based software company generated better than expected bottom and top line results for its third fiscal quarter: Snowflake earned $0.20 per-share in adjusted EPS, out-performing the average prediction by $0.05 per-share. The company’s top line came in at $942M, beating the consensus estimate by $44M.

Snowflake blew past consensus estimates as well as its own guidance on stronger than expected customer acquisition and demand for Cloud services. The software company grew its total customers 4% quarter-over-quarter to an all-time record of 10,618. Importantly, Snowflake out-performed its own guidance in terms of product revenues, which made up the majority of revenues for the company (96%): total product revenues surged 29% year-over-year to $900M which compares against a projection of up to $855M in product revenue. The stronger than expected performance has been driven by customer acquisition as well as high customer net retention rates.

Customer retention is a key metric for software companies that run platform businesses and therefore have considerable scale benefits. Net revenue retention is an important measure to quantify a software company’s potential to monetize its customer base and upsell it to premium products.

Net revenue retention is calculated by dividing product revenues from a defined customer pool by product revenues from the same customers in the previous reporting period. The result is a percentage figure that expresses by how much companies are increasing their platform-spend from one period to the next. In the case of Snowflake, this percentage remained steady at 127% in the October quarter, meaning the typical customer increased its platform spending by 27% Y/Y in Q3’25. Although the longer-term trend points south, a 127% retention rate is pretty good for a software company.

Snowflake generated $78.2M in free cash flow in Q3’25, a solid $19.4M more than in the previous quarter (+33% Q/Q). On a year-over-year basis, however, Snowflake’s free cash flow dropped 23%, mostly due to higher capital expenditures and software development costs.

In terms of free cash flow margins, Snowflake posted a 1% sequential improvement in its margin to 8%. Software companies benefit from the renewal of licenses at the end and beginning of a fiscal year which is when corporate customers tend to make purchase and renewal decisions for software packages. Therefore, cloud-based software companies like Snowflake see an increase in free cash flows in Q4 and Q1, as you can see in the chart below.

Click to enlarge

(Source: Author)

Snowflake raised its outlook for FY 2024

The cloud-based software platform did not only out-perform top line estimates, but also raised its guidance for FY 2025 product revenue. The software company now sees $3.43B in product revenue for the full fiscal year as opposed to $3.36B previously. This means that Snowflake now projects 29% Y/Y product revenue growth compared to 26% previously.

Snowflake is worth the price

I aggressively recommended Snowflake near 1-year lows in August. Since then, Snowflake’s shares have surged 48% with the majority (33%) of the price gain happening on Thursday.

Snowflake is currently valued at a price-to-revenue ratio of 13.0X which is not a high multiplier for large-scale platform businesses that grow their top lines at double-digit rates annually. Historically, Snowflake has also traded at a much higher price-to-revenue ratio of 17.6X… which is a multiplier the company has achieved shortly after the pandemic boosted the company’s top line growth. Other cloud-based data companies like Zscaler (ZS), Datadog (DDOG) and Cloudflare (NET) trade at price-to-revenue ratios between 10.0X and 17.1X with the average platform business being priced at a P/S ratio of 13.8X.

Given the strength in product revenue growth, improving free cash flow margins and a raised outlook for FY 2025, I believe shares of Snowflake are still undervalued and could re-price to a price-to-revenue ratio of ~15.0X… which would still be way below the 3-year average P/S ratio of 17.6X. A 15X P/S ratio implies a fair value in the neighborhood of $198 per-share and calculates to an addition 15% upside revaluation potential compared to Thursday’s closing price. This is a dynamic value, however, and it could rise or fall depending on how well Snowflake executes in terms of customer acquisition, retention, and free cash flow growth.

Risks with Snowflake

Snowflake is growing its product revenue quickly, which is driven both by new customers joining the Snowflake platform and by organic top line growth driven by seasoned customers that ramp up their platform spend. Therefore, Snowflake’s valuation is chiefly backed by the company’s potential to expand its revenue base. What would therefore change my mind on Snowflake is if the cloud-based data platform were to either see slowing product revenue growth or weaker free cash flow margins.

Final thoughts

Snowflake reported much better than expected third fiscal quarter earnings on Thursday. The company’s free cash flow also looked healthy, and FCF margins expanded Q/Q. Snowflake also raised its guidance for FY 2025 product revenue and saw stable net retention rates… of which I believe support my strong buy rating. In my opinion, the cloud-based software enterprise remains an attractive cloud investment, even after Thursday’s 33% increase in market cap. With customers continuing to flock to the Snowflake platform and shares still trading significantly below the longer term price-to-revenue ratio, I believe Snowflake continues to have upside revaluation potential.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SNOW either through stock ownership, options, or other derivatives. 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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• Snowflake’s stock surged 48% since my ‘Strong Buy’ rating in August 2024; I reiterate a ‘Strong Buy’ with a $215 price target.
• SNOW’s strategic partnership with Anthropic will enhance Cortex AI, driving significant growth and adoption among existing customers.
• Q3 FY25 results showed 28.3% YoY revenue growth, 55% RPO growth, and a net retention rate of 127%, prompting raised full-year guidance.
• Key risk: Databricks’ rapid growth and AI model development could challenge Snowflake’s market position; investors should monitor closely.

Since I published my ‘Strong Buy’ thesis on Snowflake (NYSE:SNOW) in August 2024, the stock price has surged by more than 48%. I discussed the potential impact from their cyberattack in the previous article. Snowflake delivered a strong Q3 result, beating the market expectations. I reiterate a ‘Strong Buy’ with a one-year price target of $215 per share.

Anthropic Will Be Available Within Snowflake Cortex AI

On November 20th, 2024, Snowflake and Anthropicsigned a multi-year strategic partnership to integrate Anthropic’s latest Claude 3.5 Sonnet model into Snowflake’s platform. Anthropic’s AI model will be available for uses within Snowflake Cortex AI. As discussed in my previous article, Snowflake Cortex AI can help customers build generative AI applications, leveraging fully managed large language models (LLM). Customers could utilize AI models with no-code, SQL and Python interfaces. With the partnership with Anthropic, I believe Snowflake can bring its Cortex AI to the next level.

During the Q3 FY25 earnings call, the management highlighted significant adoption of Cortex AI among existing customers and improvements in go-to-market efforts. Snowflake Cortex AI could become a significant growth driver for Snowflake in the near future, in my view.

Q3 Result and Outlook

Snowflake released its Q3 FY25 result on November 20th after the market close, reporting 28.3% year-over-year growth in revenue and 55% growth in remaining performance obligations (RPO).

Following the strong growth in revenue and RPO, the company raised its full-year guidance for product revenue growth to 23% year-over-year growth. Notably, Snowflake also reported a net retention rate of 127%,reflecting strong adoption of Snowflake’s platform and AI functionality.

On the capital allocation front, Snowflake repurchased $1.9 billion of own stocks year-to-date, with $2 billion remaining on their authorization through March 2027, as noted during the earnings call.

For the near-term growth, I am considering the following drivers:

• As discussed in my previous article, Snowflake operates on a consumption-based pricing model, with revenue tied to actual customer usage. It is quite normal for enterprise customers to test some workflows on Snowflake’s platform, then scale usage for data analytics. I anticipate Snowflake will generate 10% annual revenue growth from existing customers as consumption increases.
• Snowflake has done a great job to increase their large-customer base. As of Q3 FY25, there were 542 customers with trailing 12-month product revenue greater than $1 million, growing by 24.3% year-over-year. I anticipate the company will continue adding new customers, contribute 20% growth to the overall topline.
• I anticipate the company will allocate 5% of revenue toward M&A, contributing 1% growth to the topline.
• Snowflake spent heavily in R&D and sales/marketing, representing over 45% and 49% of revenue in FY24, respectively. I project the company will continue investing in their R&D, sales and marketing. However, as the business scales, I anticipate the company will generate operating leverage from both R&D and sales/marketing. I calculate the total operating expenses will grow by 24.5% annually, leading to an operating margin expansion to 30% by FY24. I think a 30% operating margin is typical for software companies.
• The cost of equity is calculated to be 14% assuming: risk free rate 3.6%; beta 1.49; equity risk premium 6%.

With these assumptions, I calculate the free cash flow from equity (FCFE) as follows:

Discounting all the future FCFE to the year-end of FY25, the one-year target price is calculated to be $215 per share, as per my estimates.

Key Risk

Databricks is Snowflake’s main competitor. As reported by the media, Databricks expects to achieve $2.4 billion in annualized revenue, growing 60% year-over-year. While Databricks’s revenue is slightly lower than Snowflake’s, Databricks is growing rapidly. In addition, Databricks has been developing their own AI model, DBRX, with a plan to launch under an open-source license. Snowflake’s investors should pay attention to Databricks’s progress with their own AI model and customer adoption.

Conclusion

Snowflake delivered a robust quarterly result, firing on all cylinders. I think their partnership with Anthropic could potentially strengthen their platforms and AI offerings. I reiterate a ‘Strong Buy’ with a one-year price target of $215 per share.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SNOW either through stock ownership, options, or other derivatives. 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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• Snowflake Inc. achieved 48.5% growth since August, with $900M in Q3 product revenue and a 127% retention rate, but valuation remains high, requiring cautious investment.
• Q3 gross margin at 76% and partnerships with Nvidia and AWS enhance AI and data cloud leadership, though stock-based compensation pressures profitability.
• Stress-tested valuation suggests a 32.68%-47.91% margin of safety, justifying a Buy rating for high-risk, high-reward investors at a moderate portfolio weight.

Since my first Hold rating on Snowflake Inc. (NYSE:SNOW) in April, the stock has only achieved an 8.5% return. However, since my August Hold rating (where I noticed its more reasonable valuation but cautioned on potential further downward momentum and the long-term risk of the allocation), it has gained 48.5% in price. The company is still battling for profitability on the net margin level with high levels of stock-based compensation (also devaluing shares), but its non-GAAP free cash flow margin is now 9% as of Q3.

Though the company is growing very fast, its valuation (while much lower than post-IPO) is still high. Therefore, it’s best to proceed with moderation in this investment, as returns are high-reward but also high-risk.

Q3 Earnings

In Q3, Snowflake Inc. reported product revenue of $900 million, which is up 29% year-over-year, exceeding expectations. In addition, its remaining performance obligations reached $5.7 billion, with year-over-year growth accelerating to 55%. Its net revenue retention rate stabilized at 127% for the second consecutive quarter. These are all exceptional reasons to be bullish on Snowflake. Indeed, the company does offer a compelling position in a burgeoning market opportunity in unified data warehousing and access.

For FY25, management has provided guidance on product revenue being $3.43 billion, up 29% year-over-year.

This Q3 earnings report really affirmed that Snowflake is a special, well-managed, and well-positioned company. Indeed, significant partnerships, such as with Nvidia (NVDA) and Anthropic, have allowed for cutting-edge AI capabilities, and its Amazon (AMZN) Web Services (“AWS”) partnership generated $3.9 billion in bookings over the last four quarters, a 68% year-over-year increase.

We should also hone in on the company’s margins, where the gross margin of 76% proved stable sequentially. In addition, its non-GAAP operating margin was 6%, higher than its guidance due to cost management and operational efficiencies. Combining this stability and expansion with the non-GAAP free cash flow margin of 9% reported by management, this is a business one can quite confidently get behind as a small, high-return, high-risk investment. However, the major caveat to this remains the company’s valuation.

Valuation

The company’s EV-to-revenues ratio has been in a medium-term decline. This may change (given we may be nearing the trough of negative sentiment related to its valuation). That said, it remains to be seen what EV-to-revenues ratio the market deems stable and suitable for Snowflake in the medium to long term.

The following charts are for investment sentiment analysis, not operational peer analysis.

For conservatism, I will be using a terminal EV-to-revenues ratio of 14 in my valuation model, which is approximately the average of the three companies I have used in my investment sentiment peer analysis. The charts also show that among the companies, sentiment has begun to stabilize somewhat, making a moderate EV-to-revenues expansion possible in the medium term.

Click to enlarge

• Snowflake’s weighted average cost of capital is 7.8%, with an equity weight of 98.7% and a debt weight of 1.3%, with equity costing 7.898% and debt at 0.0916% (after tax).

Management

Given that I am bullish about this company, it’s worth getting a good understanding of the company’s management to ensure that invested capital is guarded well.

Sridhar Ramaswamy serves as the CEO, with a background in AI and leadership at Google (GOOGL, GOOG). He joined Snowflake in 2023 after co-founding Neeva. Michael Scarpelli, the CFO since 2019, has extensive experience in financial leadership, including a role at ServiceNow (NOW). Christian Kleinerman, the Senior VP of Product, has over 20 years of expertise in database technologies and product management.

Looking at the Board of Directors, Frank Slootman, the Chairman of the Board, was the former CEO of Snowflake until 2024 and was instrumental in scaling the company during his leadership. Having his oversight as Chairman of the Board provides stability and consistent vision alongside the active CEO role being filled by Sridhar Ramaswamy. Mark McLaughlin is the former CEO of Palo Alto Networks (PANW), bringing cybersecurity expertise to the boardroom. Additionally, the Board of Directors includes Mark Garrett, who previously served as CFO at Adobe (ADBE), Jayshree Ullal, who is President and CEO of Arista Networks (ANET), and Jeremy Burton, who has had leadership and marketing roles across major tech firms, including at Dell (DELL).

Given the extensive range of executive leadership and governance, I’m very confident in my Buy rating. Even at the present valuation, the likelihood of this being sustained with continued growth and net revenue retention is quite high, in my opinion.

Risks

Indeed, the greatest risk to this thesis is that the market does not sustain the present sentiment for the company. Key catalysts that would contribute to this include missing guidance due to market dynamics proving less lucrative than expected, struggles with achieving a reliable net income over the long term, and too heavy a reliance on stock-based compensation (“SBC”) for too long, deteriorating the value of shareholders’ equity.

We may stress test my valuation model with a much more conservative estimate of $6.5 billion in total revenue for Fiscal 2028. At an EV-to-revenues ratio of just 11.5, this would lead to a January 2028 enterprise value of $74.75 billion. As the current enterprise value is $39.67 billion in November 2024, the implied enterprise value CAGR is 22.15%. In addition, when discounting back $74.75 billion at a discounted rate of 7.8% (equal to the company’s weighted average cost of capital), we arrive at an implied intrinsic enterprise value of $58.93 billion. As the current enterprise value is $39.67 billion, the implied margin of safety for investment in this conservative model is still a high 32.68%. Therefore, Snowflake remains a Buy even when stress-tested for risks.

Conclusion: Buy

Snowflake Inc. is a well-governed company with a distinct market position in the very high-growth data industry. While its valuation is high, this may be sustainable, given my investment peer analysis and the company’s robust growth horizon. Due to the volatility risk, my rating is a Buy and not a Strong Buy, but I consider this to be quite a wise investment at a moderate weight in portfolios based on my reanalysis.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOGL, AMZN either through stock ownership, options, or other derivatives. 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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