Is Snowflake Stock a Buy After Another Earnings Dip?

The cloud data market is booming, driven by the need for scalable, secure, and efficient solutions. In today's digital world, where organizations grapple with massive datasets, cutting-edge technologies like artificial intelligence (AI) are the lightning bolt revolutionizing everything. Snowflake Inc. (SNOW) is leading the charge in cloud data warehousing, leveraging AI to stand out.

However, it has not all been smooth sailing for Snowflake this year. SNOW stock took a hit after a CEO shuffle in February, lackluster guidance, and a fiscal Q1 earnings miss. Despite the stock’s steep 43% pullback from its 52-week high of $237.72, set on Feb. 12, market watchers remain optimistic about its future.

With a consensus “Moderate Buy” rating and projected 50% upside to the average analyst price target, is Snowflake a quality AI stock to consider buying after the earnings dip? Let's have a closer look.

About Snowflake Stock

Montana-based Snowflake Inc. (SNOW) provides a cloud-based data platform for organizations globally, valued at $47.1 billion by market cap. Its Data Cloud consolidates data for comprehensive business insights, AI-driven applications, and data sharing. Known for its large language model "Arctic," Snowflake supports AI solutions and enterprise efficiency in coding and development.

Collaborations with Fiserv (FI) and a robust partner network, including EY and Deloitte, underscore its role in securing financial data access and expanding data capabilities. With support for unstructured data, now used by 40% of customers and gaining 1,000+ new users in six months, Snowflake's Iceberg feature is expanding its data footprint, attracting over 300 customers in public previews.

Shares of the cloud computing company have declined 32% on a YTD basis, significantly underperforming the broader S&P 500 Index's ($SPX)9.1% returns over the same time frame.

In terms of valuation, Snowflake stock trades at 17.65 times sales, lower than its five-year average of 43.33x, but higher than some of its industry peers.

Snowflake’s Mixed Q1 Earnings

Snowflake's stock slumped after the cloud software company reported mixed fiscal Q1 earnings results on May 22. Revenue of $828.7 million, up 33% year over year, beat revenue projections by 5.5%. Product revenue, which accounts for most of Snowflake’s top line, advanced 34% annually to $789.6 million, surpassing its own guidance range between $745 million and $750 million. However, adjusted earnings dropped to $0.14 from $0.15, missing Wall Street’s estimates by 19.8%. 

Snowflake boasts 485 customers with trailing 12-month product revenue over $1 million, marking 30% year-over-year growth. Additionally, it has 709 Forbes Global 2000 customers, an 8% increase. As of April 30, its net revenue retention rate stands strong at 128%.

In Q1, Snowflake locked in $5 billion in RPO (Remaining Performance Obligations). While slightly lower than the $5.2 billion in fiscal Q4, it still marks a robust 46% annual increase. This means Snowflake has secured significantly more future business compared to the prior year quarter.

Looking ahead, Snowflake projects fiscal 2025 product revenue of $3.3 billion, edging out its previous outlook of $3.25 billion and reflecting 24% annual growth. The company lowered its adjusted product gross profit margin to 75% from the prior forecast of 76%, citing increased AI investments. Additionally, management reduced the adjusted operating margin to 3% from 6%, while the adjusted free cash flow margin was trimmed from 29% to 26%.

Analysts tracking Snowflake predict its GAAP loss per share to narrow by 2.7% to $1.83 in fiscal 2025, with losses widening by 7.7% to $1.97 per share in fiscal 2026.

Snowflake's Late February Setbacks and Leadership Shift

Snowflake's shares slipped in late February due to multiple factors. While its top-line growth stabilized, retention rates declined, impacting investor confidence. The company's usage-based fee structure, rather than recurring subscriptions, left it susceptible to economic shifts and reduced software spending. Intense competition from cloud infrastructure giants Amazon (AMZN) Web Services (AWS), Microsoft (MSFT) Azure, and Google (GOOGL) Cloud added pressure.

Moreover, despite beating Q4 earnings expectations on Feb. 28, Snowflake's underwhelming first-quarter guidance for product revenue sparked investor concerns. Compounding the stock’s selloff, CEO Frank Slootman's retirement announcement and the appointment of Sridhar Ramaswamy, Google’s former ad chief, raised uncertainty, despite Slootman remaining as chairman of the board.

What Do Analysts Expect for Snowflake Stock?

Analysts are staying bullish on SNOW after its latest earnings report. On May 23, RBC Capital Markets analyst Matthew Hedberg reiterated an “Outperform” rating and raised the price target to $226 based on Snowflake’s “strong” Q1 product revenue. Similarly, JPMorgan's (JPM) Mark Murphy, KeyBanc's (KEY) Eric Heath, and Rosenblatt's Blair Abernethy all raised their respective price targets for Snowflake, and backed “Buy” equivalent ratings on the stock.

Conversely, Needham reduced Snowflake's price target to $210 from $240 while maintaining a “Buy” rating. The analysts said that investor concerns over Snowflake's revised operating and free cash flow margin guidance reflects a “short term view,” and wrote, "Snowflake is investing in a rapidly-evolving market to ensure long-term positioning, and has a number of new products coming to market later this year."

Similarly, Stifel and Loop Capital also reduced their price targets on Snowflake stock, and reiterated bullish ratings.

Snowflake has a consensus “Moderate Buy” rating overall. Of the 41 analysts covering the stock, 26 advise a “Strong Buy,” three recommend a “Moderate Buy,” 10 suggest a “Hold,” and the remaining two give a “Strong Sell” rating.

The mean price target of $202.73 suggests an upside potential of 50.4% from the current price levels. The Street-high target price of $240 for Snowflake implies the stock could rally as much as 78%.