After Earnings, Is Snowflake Stock a Buy, a Sell, or Fairly Valued?

Snowflake released its third-quarter earnings report on Nov. 20. Here’s Morningstar’s take on Snowflake’s earnings and stock.

Key Morningstar Metrics for Snowflake

• Fair Value Estimate: $129.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Snowflake’s Q3 Earnings

• The company beat consensus and guidance for product revenue growth and increased its full-year guidance for revenues and margins. As a result, the stock popped. It had been beaten up for much of 2024, as the market did not like slowing growth at the start of the year or the firm’s worse margin outlook. There have also been questions about Snowflake’s artificial intelligence strategy and how much it will benefit.
• We lowered our fair value estimate from $187 per share to $129, as the analyst covering the stock changed and we lowered our longer-term revenue growth numbers.
• The fourth quarter will be important. We think the company will need to beat its updated guidance materially and have a strong low-20% revenue growth guide for 2025 to meet the market’s updated expectations.
• We think there are risks to the growth story, including deteriorating sequential growth rates, increasing competition, and questions about how much revenue the company will generate from AI demand.

Fair Value Estimate for Snowflake

With its 2-star rating, we believe Snowflake’s stock is overvalued compared with our long-term fair value estimate of $129 per share. Our valuation implies a forward fiscal-year enterprise value/sales of 10 times. We expect Snowflake will achieve a compound annual growth rate for revenues of 22% (17%) over the next five (10) years, driven by an expansion of the overall data lake and data warehouse TAM, along with Snowflake taking share. This substantial growth is driven by workloads continuing to shift to cloud environments.

Read more about Snowflake’s fair value estimate.

Economic Moat Rating

While there are probably some elements of switching costs present, we do not have enough confidence in the firm’s returns on invested capital 10 years from now to award the company a moat. Snowflake is a fast-growing provider of data lake, data warehousing, and data sharing solutions. The company’s value proposition lies in storing data in the cloud through its combined data lake and data warehouse platform. Traditionally, data has been recorded in and accessed via databases, such as Oracle’s database or SAP’s HANA. The rise of the public cloud has resulted in an increasing need to access data from different databases in one place, in different formats and structures. A data warehouse and data lake can serve these needs by gathering data from various databases in one place with more cloud-friendly structures.

Read more about Snowflake’s economic moat.

Financial Strength

We believe Snowflake is financially stable and will generate positive free cash flow over the long term. Snowflake had cash and cash equivalents and investments of $4.1 billion at the end of October 2024, with $2.3 billion in debt on its balance sheet. Undergoing its IPO in the 2020 calendar year, Snowflake raised over $3 billion from the offering. We model only moderate acquisitions in our explicit 10-year forecast, as we think Snowflake will focus primarily on in-house R&D and investing in its sales team.

Read more about Snowflake’s financial strength.

Risk and Uncertainty

Snowflake is still in the unprofitable high-growth phase of its lifecycle. The key risk and uncertainty we see relate to its future growth. The outlook could change dramatically if Snowflake keeps taking share, or if growth decelerates. Snowflake runs the risk that other cloud-neutral software will enter its market or that competition will increase from public cloud providers.

Read more about Snowflake’s risk and uncertainty.

SNOW Bulls Say

• There are long-term tailwinds in the data space, which could fuel growth.
• If Snowflake can figure out how to monetize features that fit with the AI demand boom, that could be another growth driver.
• Snowflake could expand to other multi-cloud data needs, pushing spending per customer higher.

SNOW Bears Say

• This space is increasingly competitive, and there are other offerings in the marketplace, both from the public cloud providers and independent providers.
• Snowflake’s valuation is demanding, and without its heavy use of stock-based compensation, it would not be cash-flow positive. Any slowdown in growth could be devastating to the valuation.
• There is still a lot of uncertainty about how much revenue attributable to AI Snowflake will ultimately generate.

This article was compiled by Sokhoeun Noeut.