Snowflake's (NYSE: SNOW) stock plunged 15% on Aug. 22 after it posted its latest earnings report. For the second quarter of fiscal 2025, which ended on July 31, the cloud-based data warehousing company's revenue rose 29% year over year to $869 million and cleared analysts' estimates by $19 million. Its adjusted net income fell 21% to $64 million, or $0.18 per share, but still beat the consensus forecast by two cents.
Snowflake exceeded Wall Street's expectations, but its declining retention rates, dim outlook, and recent data breach all weighed down the stock. CEO Frank Slootman's abrupt departure in February and Berkshire Hathaway's recent exit from the stock cast even more dark clouds over its future. Snowflake now trades slightly below its IPO price of $120, but is it the right time to buy or sell the stock?
Image source: Getty Images.
What does Snowflake do?
Large organizations often scatter their data across a broad range of software, services, and computing platforms. That fragmentation can create inefficient "silos" and make it difficult to make data-driven decisions. To remedy that, companies often funnel their data into cloud-based data warehouses which clean up and organize all of that information so it can be easily accessed by third-party data visualization and analytics apps.
Amazon, Microsoft, and other cloud leaders already integrate data warehouses into their own infrastructure platforms, but their services often lock their customers into their broader ecosystems. That's not an ideal solution for companies that rely on multiple cloud infrastructure platforms.
Snowflake addresses that issue by running its cloud-based data warehouse on top of Amazon Web Services (AWS), Microsoft Azure, and other cloud platforms. That flexibility, along with a usage-based pricing system that only charges customers for the storage and computing power they actually need, drove its initial growth spurt.
Why is Snowflake's stock melting?
Snowflake's product revenue, which accounts for most of its top line, surged 120% in fiscal 2021 (which ended in January 2021) and 106% in fiscal 2022. Its net revenue retention rate, which measures its year-over-year growth per customer over a trailing-12-month period, also expanded from 168% in fiscal 2021 to 178% in fiscal 2022.
Those growth rates drew a stampede of bulls to Snowflake when it went public on Sept. 16, 2020. It more than doubled from its IPO price of $120 to $245 on its first trade, and it eventually soared to a record high of $401.89 on Nov. 16, 2021. But at its peak, its enterprise value hit $119 billion -- or 43 times the revenue it would generate in fiscal 2023.
Those nosebleed valuations set it up for a steep decline as its revenue growth cooled off. In fiscal 2023, its product revenue still grew 70% -- but its net revenue retention rate slipped to 158%. In fiscal 2024, its product revenue only rose 38% as its net revenue retention rate dropped to 131%. That deceleration continued over the past year.
Metric | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 |
|---|---|---|---|---|---|
Product revenue growth (YOY) | 37% | 34% | 33% | 34% | 30% |
Net revenue retention rate | 142% | 135% | 131% | 128% | 127% |
Data source: Snowflake. YOY = Year-over-year.
For the third quarter, Snowflake expects its product revenue to only rise 22% year over year. Analysts expect its total revenue to grow 24% for the full year. Snowflake attributes that slowdown mainly to the macro headwinds, and it insists the recent data breaches linked to its data warehouses hadn't meaningfully impacted its business. During the second-quarter 2025 conference call, CEO Sridhar Ramaswamy said the "issue wasn't on the Snowflake side" and the company found "no evidence" that its platform was "breached or compromised." Instead, he blamed the intrusion on cybersecurity lapses at some of its clients.
Yet Snowflake's margins are still shrinking as its growth cools off. In the second quarter, its adjusted product gross, operating, and free cash flow (FCF) margins all shrank year over year -- which suggests it's losing its pricing power in its niche market.
Metric | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 |
|---|---|---|---|---|---|
Adjusted product gross margin | 78% | 78% | 78% | 77% | 76% |
Adjusted operating margin | 8% | 10% | 9% | 4% | 5% |
Adjusted FCF margin | 13% | 15% | 42% | 44% | 8% |
Data source: Snowflake.
Snowflake expects its adjusted operating margin to shrink to just 3% in the third quarter as it ramps up its R&D and go-to-market investments. Analysts expect its adjusted EPS to decline 37% for the full year as it stays unprofitable on a generally accepted accounting principles (GAAP) basis. That red ink could limit its gains as long as interest rates stay high.
Is it time to buy or sell Snowflake's stock?
At $115, Snowflake's stock still looks pricey at 10 times this year's sales. It also probably won't bottom out until its revenue growth, retention rates, and margins stabilize for a few consecutive quarters.
That's probably why its insiders sold more than four times as many shares as they bought over the past 12 months, and why Berkshire liquidated its stake this year. So for now, I think it's still smarter to avoid or sell Snowflake than to buy it.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon and Berkshire Hathaway. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, Microsoft, and Snowflake. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
