Shares of artificial intelligence (AI) data cloud company Snowflake (SNOW) jumped about 20% in extended trading following the company’s Q3 earnings report. The company delivered better-than-expected results and provided upbeat guidance, lifting investor sentiment.
Notably, SNOW stock had faced headwinds going into its Q3 announcement. Concerns over declining customer retention, slowing product revenue growth, and margin pressures weighed on its valuation. However, Q3 brought some relief on a couple of fronts, namely:
- Stabilized Retention Rates: Snowflake’s retention rate, which had been consistently declining, finally showed signs of stabilization—a welcome sign for investors.
- Upgraded Guidance: Snowflake raised its full-year product revenue guidance, signaling management’s confidence in the business.
These positives overshadowed lingering concerns and sparked a sharp rally in the stock. However, despite the upbeat Q3 results, Snowflake continues to witness challenges. While the company’s product revenue grew, the growth rate continued to moderate sequentially. Further, the Q4 outlook suggests further deceleration. Moreover, Snowflake’s product margins stabilized quarter-over-quarter due to higher sales, but are still under pressure, with year-over-year declines highlighting ongoing challenges.
With this background, let’s examine Snowflake stock closely following its Q3 earnings release to determine whether it is a buy, sell, or hold.
Snowflake: Q3 Highlights
Snowflake delivered Q3 revenue of $942.1 million, up 28% year-over-year. Moreover, its top line surpassed the Street’s forecast of $898.5 million. Product revenue—its key growth driver—grew 29% to $900.3 million, surpassing the $848 million consensus forecast.
After trending lower for several quarters, its net revenue retention rate was stable at 127% as of Oct. 31.
Thanks to solid product revenue, Snowflake delivered adjusted earnings of $0.20 per share, surpassing analysts’ estimate of $0.15. However, its adjusted earnings declined by 20% year-over-year, reflecting pressure on margins due to higher operating expenses, including sales and marketing.
Snowflake Stock: The Bull Case
Snowflake’s product revenue continues growing, and the company once again raised its outlook. This reflects an improved go-to-market strategy, which is driving new product adoption.
The company is also witnessing an improvement in bookings, led by an increase in large deal volumes. In Q3, Snowflake signed $350 million-plus in total contract value deals, and expects this momentum to carry into Q4. Management has indicated that Q4 will be a standout quarter for bookings, thanks to a mix of new and renewed contracts. Renewals are particularly promising, as they include expanded commitments from existing customers.
Another bright spot is Snowflake’s ability to attract and retain high-value customers. The company now has 542 customers generating more than $1 million in trailing 12-month product revenue, a 25% year-over-year increase. Additionally, it boasts 754 Forbes Global 2000 clients, up 8% from the prior year. This growing roster of high-value customers highlights Snowflake’s appeal among major enterprises seeking data solutions.
Snowflake’s remaining performance obligations (RPO), which is a key future revenue metric, increased 55% year-over-year to $5.7 billion. This substantial increase shows the company’s strong pipeline of future growth.
The company’s Cortex AI solution and other AI/ML features are gaining traction, with more than 1,000 deployed use cases and over 3,200 accounts utilizing its artificial intelligence (AI) capabilities. These developments bode well for growth and position the company to capitalize on the growing AI market.
Snowflake Stock: The Bear Case
Snowflake’s customer base is expanding, and it is rolling out new products, but its product revenue growth rate is showing signs of slowing. In Q3, the company reported a 29% growth in product revenue—down from 30% in Q2, and 34% in Q1.
Looking ahead, Snowflake expects Q4 product revenue to land between $906 million and $911 million. While this represents a 23% year-over-year increase, it also marks a further sequential slowdown.
For the full fiscal year, the company projects product revenue of $3.43 billion, reflecting a 29% increase. However, this is a noticeable deceleration compared to the 38% growth in fiscal 2024, despite Snowflake raising its earlier guidance.
Alongside slowing growth, Snowflake’s profitability metrics are also facing headwinds. In Q3, the company’s adjusted product gross margin slipped to 76%, down from 78% a year earlier. Additionally, the adjusted operating margin fell to 6%, representing a sharp 400 basis-point drop year-over-year.
For the full year, Snowflake forecasts further declines, with a 200-basis-point drop in product margin and a 300-basis-point reduction in adjusted operating margin. These figures suggest that the company’s efficiency measures are struggling to offset rising costs and competitive pressures.
The Bottom Line
The spike in Snowflake stock was likely due to the company showing signs of improvement, including continued product revenue growth, growth in high-value customers, and solid RPO. Further, Snowflake focuses on reducing costs, which should support margins in the coming quarters.
That said, it’s not all smooth sailing for Snowflake. The company is grappling with a slowing growth rate in product revenue and ongoing pressure on its margins—factors that could temper some of the enthusiasm.
Wall Street analysts have a “Moderate Buy” consensus rating on Snowflake.
