Why Snowflake Stock Dropped 12% Last Month

Data storage and analytics company shares Snowflake (SNOW 1.05%) fell 12.4% in August, according to data provided by S&P Global Market Intelligence. Shares were crushed after the company reported fiscal second-quarter 2025 results on Aug. 21 — but the price drop confused many investors.

Here’s why the stock drop was confusing to some: In the quarter, Snowflake generated $829 million in product revenue, which was well ahead of the $810 million that had been the high end of management’s guidance range. Moreover, management subsequently raised its full-year revenue guidance. In other words, business appears to be better than expected.

However, profit trends appear problematic. The company expects adjusted gross margin to decrease from 78% in fiscal 2024 to 75% in fiscal 2025, and adjusted operating margin is expected to decrease from 8% to 3%.

True, Snowflake’s revenue trends are better than expected, and management has raised its top-line guidance. But its guidance for its profit metrics did not improve, which was another cause for concern.

Where does Snowflake’s money go?

Snowflake is a data company, and the artificial intelligence (AI) trend is fueled by data, which would seem to indicate that this should be Snowflake’s time to shine. But building the infrastructure needed to support AI comes at a cost. The company’s R&D spending is growing rapidly as it buys equipment and hires workers to build compelling AI products and features.

This trend is likely to continue for the company. It has a usage-based revenue model, so it generates more revenue as its customers use its platform more. And right now, enterprises are curious about AI so that they expand the use of the platform. Therefore, investments in artificial intelligence will continue, but they will be a drag for some time.

Is there any hope for Snowflake’s shareholders?

The good news for Snowflake shareholders is that many of its key business metrics — customer numbers, retention rates, etc. — are still on the right track. To share just one statistic, the company now has more than 10,000 customers, compared to about 8,500 a year ago. This is strong growth.

Furthermore, trading at 11 times sales, Snowflake shares have never been cheaper, as the chart below shows.

SNOW PS report data by YCharts.

Snowflake’s business still has some strengths, and the stock’s valuation has come down a lot. That’s good. But unfortunately, even that lower valuation still assumes a lot of long-term profit growth and expansion. Therefore, the company must find ways to grow and ultimately exercise some operating leverage. Shareholders will have to be patient for now, recognizing that some of these improvements may still be a long way off.