Snowflake Stock Rose 10% After Strong Earnings Growth. Is it a Buy?
Key Morningstar Metrics for Snowflake
- : $284.00
- : ★★★
-
Morningstar Economic Moat Rating
: None
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Morningstar Uncertainty Rating
: Very High
What We Thought of Snowflake’s Q2 Earnings
Snowflake maintained its extraordinarily strong artificial-intelligence-led growth momentum in the second quarter. Total revenue growth accelerated to 35%, easily beating last quarter’s 30% guidance. Non-GAAP operating margin of 15.3% was also 280 basis points higher than guidance.
Why it matters: Adoption of Snowflake’s AI offerings, Cortex Code (or CoCo) and CoWork, came faster than we expected. They are both new products introduced in 2026. Now, more than 60% of Snowflake accounts use CoCo, and nearly 40% use CoWork. CoCo added over 2,000 clients during the quarter.
- CoCo and CoWork are expanding the average size of each account. The number of customers spending at least $1 million annually with Snowflake more than doubled over the past three years, while total customer count grew 70% over the same period.
- Snowflake’s net revenue retention was resilient at 126%. We believe customers’ strong interest in Snowflake’s AI products will likely keep NRR elevated, underpinning our 32% revenue growth forecast over the next three years.
The bottom line: We raise our fair value estimate for no-moat Snowflake to $284 per share from $255, as we incorporate a stronger AI tailwind that benefits both revenue growth and margin improvement. Shares shot up 23% after earnings and look overvalued to us.
- Our fair value increase reflects Snowflake’s improving position as an all-in-one data platform that supports agentic AI. We think the company’s recent outperformance primarily comes from the growing enterprise AI market rather than its unique competitive advantage.
- In the long term, as enterprise exuberance around agentic AI fades, we expect tougher competition for Snowflake, which will test its elevated valuation.
Key stats: Management’s goal of GAAP profitability by the fourth quarter of fiscal 2028 appears ambitious unless share-based compensation as a percentage of revenue drops to around 20%.
The following are excerpts from Morningstar’s company report on Snowflake.
Fair Value Estimate for Snowflake
With its 3-star rating, we believe Snowflake’s stock is fairly valued compared with our long-term fair value estimate of $284, which implies a fiscal 2027 enterprise value/sales multiple of 15 times. We expect Snowflake to achieve a five-year compound annual growth rate of 28%, driven by both its core data lake and data warehouse products and the ever-growing AI portfolio.
In our view, it will take decades for Snowflake and other data platform vendors to fully penetrate the $450 billion market for analytical databases, as it takes time to set up a new enterprise system and configure the ecosystem surrounding it. As customer utilization continues to climb, Snowflake and its competitors should enjoy an extended growth runway beyond the next decade.
Read more about Snowflake’s fair value estimate.
Economic Moat Rating
We assign Snowflake a no-moat rating since the company’s revenue is not yet at a scale that can support continuous expansion investments and high return on invested capital at the same time. If Snowflake maintains a healthy growth momentum over the next few years, we believe its robust data ecosystem can eventually earn the company an economic moat as return on invested capital gradually improves. We see the potential for a two-sided network effect between users and developers as Snowflake’s data app ecosystem continues to grow. That said, it will take time for the network effect to grow and start to support Snowflake’s economic moat.
Read more about Snowflake’s economic moat.
Financial Strength
We believe Snowflake is financially stable. The company’s cash and equivalents balance has been around $4 billion since its IPO, and non-GAAP free cash flow has been positive since fiscal 2022. However, Snowflake has a history of heavily using stock-based compensation to lift its cash flows. In fiscal 2026, Snowflake’s total stock-based compensation expense surpassed $1.4 billion, or 36% of the company’s revenue. Although we forecast a gradual decline of stock-based compensation as a percentage of revenue to the mid-teens by fiscal 2035, long-term investors should consider the potential dilutive effect of Snowflake’s heavy stock-based compensation usage. We think it is unlikely that Snowflake needs to tap into the debt market for its day-to-day operations in the long term as the business already generates positive operating cash flows.
Read more about Snowflake’s financial strength.
Risk and Uncertainty
We assign Snowflake a Very High Uncertainty Rating because we believe the data warehouse and data lake competitive landscape can change very quickly. Although Snowflake is one of the leading data platform solutions today, there is no guarantee the company can keep its leadership as the market continues to evolve over the next few decades.
We think Snowflake’s relationship with hyperscalers is becoming trickier as the company grows into a well-known brand in the database field. Additional efforts to expand their in-house data platform offerings might threaten the future growth trajectory of Snowflake.
We think hyperscalers are pushing for better connectivity across different service providers, making it easier for enterprise clients to adopt first-party data platform solutions rather than seeking a third-party platform for centralized data management. While adopting a unified data query requires tremendous coordination among hyperscalers, it is a potential risk long-term investors in Snowflake should keep in mind.
Read more about Snowflake’s risk and uncertainty.
SNOW Bulls Say
- The total addressable market of data warehouse and data lake should experience double-digit annual growth over the next decade, and Snowflake is one of the leaders in the segment.
- Snowflake’s addition of machine learning and artificial intelligence functionalities should incentivize existing customers to put more data workflows on the platform.
- Snowflake’s best-in-class user experience should attract organizations without robust internal IT expertise that still want to modernize their data infrastructure.
SNOW Bears Say
- Competition with Databricks’ and hyperscalers’ data warehouse products continues to intensify, leading to heavy marketing and R&D pressure for Snowflake.
- Snowflake’s speed of gaining new logos can slow down as the company shifts its focus to incremental consumption from existing customers, limiting the monetization potential of Snowflake Marketplace.
- Snowflake’s valuation is demanding. Any slowdown in growth could be devastating to the valuation.
This article was compiled by Irza Waraich.
This article was generated with the help of automation and reviewed by Morningstar editors.
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