Is Snowflake Stock a Buy Now?

Snowflake (SNOW 0.08%) started life as a public company with big ambitions and a lot of excitement in the market. However, as of late 2021, it has been somewhat of a disappointing investment for long-term shareholders. As of 2024, the cloud data platform provider’s stock prices are down 44%, even though Nasdaq-100 Technology Sector the index increased by 6%.

Snowflake has been a perennial underperformer and has lost 56% of its value since going public in September 2020. Judging by market sentiment on the stock, it looks like there won’t be a reprieve for its investors anytime soon.

After the market closed on August 21, the company released results for the second quarter of fiscal 2025, which ended on July 31. In the trading session the next day, Snowflake’s share prices fell 15%, even as its revenue grew at a faster-than-expected pace and its earnings came in ahead of Wall Street expectations. Concerns about the company’s slowing growth, as well as disappointing guidance, appear to have investors hitting the panic button again.

Is the latest slide in Snowflake stock an opportunity for investors looking to buy a discounted but fast-growing company that could deliver healthy long-term earnings?

Snowflake sellers may have made a wrong move

In the fiscal second quarter, Snowflake’s revenue rose 29% year over year to $869 million, which was higher than the consensus estimate of $852 million. However, the company’s non-GAAP earnings fell to $0.18 per share from $0.22 per share in the same quarter last year. That number, however, was higher than Wall Street’s estimate of $0.16 per share.

Snowflake’s earnings decline was attributed to a decline in its margins. Specifically, Snowflake’s adjusted gross margin fell 1 percentage point to 73% last quarter. Non-GAAP operating margin contracted 3 percentage points to 5%. However, these declines were the result of the company’s investments in graphics processing units (GPUs) “to meet customer demand for our newer product features.”

The new product features that Snowflake is referring to are its artificial intelligence (AI) focused offerings. The company has lined up a number of generative AI-based products for launch in the current fiscal year that will enable its customers to use its proprietary data to build and deploy various types of applications.

On the bright side, Snowflake’s focus on adding AI-related functionality to its data cloud platform appears to be paying off. The company’s customer base grew 21% year over year to 10,249 customers last quarter. However, the increase in spending by existing customers was even more impressive.

Snowflake reported a net income retention rate of 127%. This metric compares the product revenue generated by Snowflake customers in a given period with the same customer’s spend during the previous year. A reading above 100% reflects that existing customers have increased their spending on its offerings.

Notably, the number of Snowflake customers delivering more than $1 million in product revenue in the past 12 months grew 28% year-over-year in fiscal Q2 to 510. This was faster than the overall base growth rate of Snowflake customers. The combination of an increase in Snowflake’s customer base, as well as its ability to generate more cash from existing customers, sets it up for robust long-term growth.

The company’s remaining performance obligation (RPO) — the future contracted revenue that has not yet been recognized — makes this clear. RPO grew 48% over last year to $5.2 billion. The growth rate of this metric was much higher than Snowflake’s revenue growth and significantly exceeded the company’s guidance for full-year product revenue growth of 26% to $3.35 billion.

So there’s a good chance Snowflake’s growth rate will accelerate going forward, which is why investors would do well to look beyond short-term guidance.

A profitable long-term growth opportunity

Management’s product revenue guidance of $850 million to $855 million for the current quarter would translate to year-over-year growth of 22 percent. That’s just above analysts’ consensus estimate of $851 million, but would still be a slowdown from last quarter’s 29% rise in product revenue. However, we’ve already seen Snowflake’s revenue stream improve considerably, so there’s a good chance it will eventually deliver stronger growth.

Additionally, Snowflake expects its total addressable market to expand from $152 billion last year to $342 billion in 2028. The addition of AI-enabled features should allow it to capture a larger share of opportunity, leading to stronger growth in the future. Additionally, the company is expected to return to earnings growth next year after this year’s anticipated decline to $0.60 per share from $0.98 per share in fiscal 2024.

SNOW EPS estimates for current fiscal year data by YCharts.

More specifically, Snowflake’s earnings are forecast to grow 55% in the next fiscal year, followed by 48% growth the following year. The market could reward this extraordinary growth in Snowflake’s earnings with more upside. At the same time, AI adoption in Snowflake’s addressable market is already helping it build a solid revenue pipeline for the future, and that could allow it to maintain its robust growth rate for a long time.

As such, the company now has stronger catalysts and a much larger addressable market to tap into, and its numbers are an indication that it is already capitalizing on this opportunity. So the steep decline in Snowflake stock can be treated as a buying opportunity, its fortunes could finally turn around after years of underperformance.