Snowflake Stock Faces Challenges But May Benefit from Cloud and AI Growth

Snowflake (NYSE: SNOW), a major player in cloud data warehousing, has faced a decline of 11% in the past year, significantly underperforming the S&P 500, which gained 28%.

Several factors have contributed to this underperformance:

Premium Valuation: Snowflake stock trades at about 180x estimated FY’26 earnings, limiting its upside during a broader software rally.

Lower Guidance and Missed Estimates: The company reduced its FY’25 guidance and missed earnings estimates earlier in the fiscal year, affecting investor sentiment.

Intensified Competition: Rivals like Databricks, which grew 60% year-over-year, and platforms like Google BigQuery and Microsoft Fabric are gaining ground, especially with their machine learning and big data processing capabilities.

However, Snowflake still has significant growth potential:

Cloud Data Warehousing: As companies continue shifting from on-premise databases to cloud solutions, Snowflake, which works across major cloud platforms (AWS, Google Cloud, Azure), stands to benefit from this trend.

AI and Generative AI: Snowflake’s AI Data Cloud is already used by over 10,000 companies, and its AI and machine learning capabilities, like the Cortex service, position it well in the expanding AI market.

Strong Retention: Snowflake boasts a 127% net revenue retention rate, indicating its product’s strong customer loyalty.

Improved Margins: As revenue scales, margins are expected to improve, with operating margins increasing from negative levels to 6% in the last quarter.

Despite its volatile performance, with returns of 20% in 2021, -58% in 2022, 39% in 2023, and -22% in 2024, Snowflake’s long-term prospects remain strong, particularly with innovations in AI and data warehousing.

Trefis estimates Snowflake’s valuation at $180 per share, slightly above its current market price, suggesting potential for future gains.