Snowflake (SNOW) AI-Powered Hot Streak Leaves Its Valuation Melting

Yahoo

29-05-2025

Snowflake (SNOW) continues to impress with its AI-driven strategy, delivering a strong Q1 FY2026 that included a 26% year-over-year increase in product revenue and a robust $6.7 billion pipeline of contracted future business. The company's transformation into a leading AI Data Cloud platform is gaining traction, fueled by high-profile partnerships with OpenAI and Anthropic—strategic moves that hint at even broader collaborations ahead.
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The vision is compelling, and the momentum is undeniable. However, from a valuation perspective, caution is warranted. Persistent net losses and substantial stock-based compensation raise concerns about the sustainability of the current share price, which already reflects much of the expected growth.
While the long-term story is exciting, I'm maintaining a Hold rating—enthusiastic about the potential, but mindful of the financial fundamentals that still need to catch up.
My Hold rating remains intact after taking a closer look under the hood. Snowflake boasts a compelling business model that continues to resonate with large enterprises, embedding itself deeper into operations by breaking down data silos, streamlining processes, and delivering value from a unified, accessible platform.
The platform itself is rapidly evolving. It now features AI agent capabilities, developer tools via Snowpark, and advanced data science functionality through Cortex. Recent high-profile partnerships with OpenAI and Anthropic further bolster Snowflake's credibility in the AI space. Management is clearly focused on expanding its developer ecosystem, aiming to empower businesses to deploy their own LLMs and AI agents within a secure, governed environment, advancing its vision of becoming the definitive 'AI Data Cloud.'
That said, the fundamentals raise some concerns. In Q1, Snowflake reported a net loss of $430 million and fell short of expectations on adjusted free cash flow, posting $206 million. These financial pressures, despite strong topline growth, signal that management still faces significant challenges in driving sustainable profitability.
While these figures aren't alarming for Snowflake's long-term outlook, the stagnation in revenue retention rates indicates that, despite steady growth and operational progress, the company faces mounting pressure. Competitors with stronger balance sheets and deeper resources are intensifying the challenge.
Capital expenditures have climbed, largely due to Snowflake's investments in AI infrastructure, its new headquarters, and an increasingly complex product suite. Though revenue growth remains robust, the company's profitability has yet to reflect the efficiencies being pursued. Notably, stock-based compensation exceeded $400 million in just one quarter, continuing to dilute shareholders and pushing out the timeline for achieving sustainable earnings.
For prospective investors, this combination of uncertainty, elevated spending, and the need to raise additional capital adds a layer of risk that's difficult to ignore.
Snowflake now operates in a significantly more competitive landscape. Its early lead in cloud-native data warehousing is being eroded by deeply integrated and widely adopted alternatives such as Microsoft Fabric, Amazon Redshift, Google BigQuery, and Databricks. Microsoft, in particular, is leveraging its expansive Azure ecosystem to bundle generative AI capabilities, creating a powerful value proposition that places considerable pressure on standalone platforms like Snowflake.
Meanwhile, Databricks has continued to gain traction, securing significant funding and rapidly expanding its user base. Competing head-to-head with tech giants may prove challenging for a company like Snowflake, which has yet to reach profitability. In this context, strategic partnerships appear to be a prudent path forward. Snowflake's alliances with Anthropic, OpenAI, Nvidia, and others are designed to strengthen its competitive position and expand its capabilities, but such partnerships are rarely straightforward.
While these collaborations enhance the platform's appeal and long-term potential, they depend on seamless integration and sustained adoption to translate into meaningful revenue. At this stage, those outcomes remain more aspirational than material. Consequently, my investment thesis rests on the view that intensifying competition could outpace Snowflake's monetization efforts unless management can significantly accelerate execution.
Snowflake reported total revenue of $1.04 billion for Q1 FY2026, exceeding analyst expectations. Remaining performance obligations increased to $6.7 billion—a 34% year-over-year rise—reflecting strong customer commitment and continued platform adoption. The company added 451 net new customers during the quarter, bringing its total to 606 customers generating over $1 million in trailing 12-month product revenue. That said, the pace of growth has clearly moderated compared to previous years, signaling a maturing business facing more measured expansion.
Despite solid growth in remaining performance obligations, profitability remains a challenge for Snowflake. GAAP losses persist, and although operating cash flow was positive, adjusted free cash flow margins fell short of expectations. The company is guiding for 25% free cash flow margins for the full year, but ongoing capital expenditures and heavy investment in AI initiatives may put downward pressure on that target.
Snowflake is currently trading at more than 18 times forward revenue, significantly above the industry average. Based on my discounted cash flow analysis—assuming a 22% compound annual revenue growth rate through FY2030, a 20% long-term free cash flow margin, and an 8.5% weighted average cost of capital—the stock's fair value is approximately $210 per share, indicating it is close to fully valued.
In a more optimistic scenario, with a 25% revenue CAGR and 25% FCF margin, the valuation could reach around $235. Conversely, under more conservative assumptions, the fair value drops to roughly $180 per share.
The analyst community maintains a generally positive yet cautious outlook on the stock. Among 40 analysts covering Snowflake, 33 are bullish, while seven are bearish. Not a single analyst is bearish on SNOW stock. SNOW's average stock price target stands at $220.54, indicating almost 7% upside potential over the coming twelve months.
Given the stock is trading close to consensus targets, any unexpected slowdown in revenue growth or customer acquisition could trigger downward pressure on the share price.
In my view, Snowflake stands out as one of the most strategically positioned enterprise platforms in the rapidly evolving AI sector. Its technology is robust, the vision compelling, and partnerships with leading tech companies lend significant credibility. However, much of this potential appears to be already reflected in the current valuation, while the financial fundamentals have yet to fully catch up. Strategic partnerships and innovation can only go so far when margins are under pressure and competition is intensifying.
For these reasons, I maintain a Hold rating. Snowflake could merit a Buy rating in the future, but only once it demonstrates a clear path to profitability and resilience amid a highly competitive market. At present, it remains a story to watch rather than chase. Investors should closely monitor capital expenditures, customer growth, and the tangible impact of AI-driven demand on revenue. Until the financials improve, I believe caution is not only prudent but essential.
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