Snowflake Stock: Melting Expectations Or Temporary Setback?

Cloud data warehousing major Snowflake stock (NYSE: SNOW) has been a laggard in the software space over the past year declining by about 11% compared to the S&P 500 which has gained 28% over the same period. So why has there been so much negativity around Snowflake’s stock? Separately, Alibaba has underperformed but looks cheap. See China’s Tech Giant At A Discount: What’s Holding Alibaba Back?

Why Did Snowflake Underperform Last Year

There have been a couple of reasons for the underperformance. Snowflake stock has typically been valued at a premium, which has limited its upside during the broader enterprise software rally last year. The stock trades at about 180x estimated FY’26 earnings currently. Besides this, in early 2024, the company cut guidance for FY’25 (FY ends in January) and also missed quarterly earnings estimates earlier in the fiscal year, and this also hurt sentiment for the stock.

Competition has also been mounting with rivals such as Databricks gaining considerable traction. Databricks said that it saw over 60% year-over-year growth in Q3, compared to about 29% growth for Snowflake’s product segment. Databricks recently raised about $10 billion in a funding round, valuing the company at about $62 billion. Unlike Snowflake, Databricks was designed with machine learning and big data processing as its core competency, and this has also been hurting the narrative around Snowflake, which is seen as a cloud-based data warehouse solution. Besides this, Google’s BigQuery platform and Microsoft Fabric cloud data analytics platform could also be seen as rivals to Snowflake, given their deeper integration with their respective public cloud ecosystems.

Why Things Could Get Better

Snowflake is likely to remain a key beneficiary of the continued pivot from on-premise databases to cloud-based warehousing solutions, which are seen as more cost-effective and scalable. Snowflake is a leader in this market, as its product works across multiple cloud platforms such as Amazon’s AWS, Google Cloud, and Azure, while also offering more flexibility by separating the billing of storage and computing.

Snowflake’s lead in the cloud data warehousing market also positions it to benefit from growth in the generative AI space. The company’s AI Data Cloud is used by over 10,000 companies to run their businesses with data, AI, and applications. Additionally, the company’s product is also very sticky, with the net revenue retention rate standing at 127% as of October 2024. Remaining performance obligations, a measure of contracted revenue that a company has yet to recognize, grew 55% year-over-year to $5.7 billion.

Snowflake has been continuing with innovative product launches, updating its artificial intelligence and machine learning functionality, with products such as Cortex, a fully managed service that provides AI and machine learning solutions for Snowflake users. These new products and application launches should also enable it to boost consumption and billings on its platform.

Margins could also improve, as revenues scale up and fixed cost absorption trends higher. For instance, operating margins over the last quarter stood at about 6%, up from negative levels in the year-ago quarter.

The decrease in SNOW stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 20% in 2021, -58% in 2022, 39% in 2023, and -22% in 2024. The Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could SNOW face a similar situation as it did in 2021, 2022, and 2024 and underperform the S&P over the next 12 months - or will it see a recovery?

We estimate Snowflake’s valuation at about $180 per share, which is marginally ahead of the current market price. See the Trefis’s analysis for Snowflakes’ valuation.

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