Snowflake (SNOW) provides a cloud-based data platform, enabling businesses to store and consolidate their data and generate meaningful insights. The company’s platform supports the application of artificial intelligence (AI), addresses complex business challenges, helps in developing data-driven applications, and sharing data and data products.
However, Snowflake stock is under pressure, declining about 30.9% year-to-date. This underperformance starkly contrasts with the S&P 500 Index ($SPX), which has gained over 18% during the same time.
The significant drop in Snowflake stock can be attributed in part to the adverse macro environment, such as persistent inflation and prolonged high interest rates. These factors have notably constrained enterprise spending on IT, and software in particular. As Snowflake's customers have rationalized their IT budgets, the challenging operating environment has prompted them to focus on cash flow management by negotiating shorter contract durations and optimizing data consumption to reduce costs.
Despite these headwinds, there are several reasons for cautious optimism regarding Snowflake’s prospects. The company’s core product revenue, which primarily consists of payments for its data platform services, remains strong. This stability is supported by Snowflake’s expanding customer base and the increasing adoption of its solutions.
Snowflake is also making significant strides in artificial intelligence, a development that could substantially enhance its platform’s capabilities and drive future growth. The company's advancements in AI present opportunities to expand and strengthen its market position and deliver increased value to its customers.
In light of these factors, it's worth asking: Is Snowflake stock a Buy, Sell, or Hold at current levels?
Snowflake Stock: The Bull Case
Despite macro headwinds, the company’s core business remains very strong, with some of its largest customers meaningfully increasing their usage of Snowflake’s core offering. Further, Snowflake’s AI products are generating strong customer interest. Its product revenue was $790 million in Q1 of fiscal 2025, up 34% year-over-year. The remaining performance obligations (RPO), a key metric of future revenue, totaled $5 billion, representing 46% year-over-year growth.
The company had 485 customers with trailing 12-month product revenue over $1 million, up 30% year-over-year. Drilling down, Snowflake also had 709 Forbes Global 2000 customers at the end of Q1, representing 8% year-over-year growth.
Thanks to the ongoing strength in its core business, Snowflake increased its product revenue outlook for fiscal 2025. The company introduced new product functionality, such as Snowpark and AI technology, into its platform, which positions it well to capture significant market opportunities ahead. Snowflake is also seeing higher demand for its platform, particularly from large enterprises, which is encouraging.
The combination of its incredibly strong data cloud, boosted by AI, will continue to drive the usage of Snowflake's platform and future revenue. Management is also making significant investments in sales, marketing, and brand awareness, which will help acquire new customers.
The Bear Case for SNOW
Snowflake is growing its high-value customer base and focusing on increasing consumption and adoption of new use cases among its existing customers. However, the macro uncertainty continues to pose challenges, and could adversely impact its growth rate.
It’s worth noting that Snowflake’s retention rate has declined over the past two consecutive years and declined below 130% in Q1, implying pressure on its business. Further, Snowflake’s product gross margins and operating margin are likely to remain under pressure and decline in fiscal 2025, due to increased GPU-related costs related to its AI initiatives and investments to drive additional revenue opportunities.
In addition, increased competition in the sector could pressure the company’s margins in the coming years.
The Bottom Line on Snowflake Stock
Given the short-term challenges, only a few analysts are not endorsing Snowflake stock at current levels. Among the 41 analysts covering SNOW, 26 have “Strong Buy” ratings, three recommend “Moderate Buy,” 10 have a “Hold,” and two suggest a “Strong Sell.” Overall, Snowflake stock has a “Moderate Buy” consensus rating.
The average price target for SNOW stock is $198.76, which indicates an upside potential of approximately 44.6% from current levels.
As Snowflake navigates these turbulent economic conditions, its strategic initiatives in AI, large addressable market, increasing customer base, and its solid revenue model provide a foundation for potential future success. While the stock’s current decline reflects macro pressures, the company’s long-term growth prospects and decrease in valuation offer buying opportunities for investors who are prepared to look beyond short-term volatility.
On the date of publication, Sneha Nahata did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
