Snowflake Slides on AI-Cost Fears Despite Strong Product Growth

Snowflake Inc. (SNOW) delivered mixed results in its recent financial update, raising concerns over its AI-driven margin outlook. The company reported an adjusted operating margin of around 7% for the period ending in January, below the 8.5% forecast from analysts. Product revenue was estimated at $1.2 billion, slightly exceeding the $1.19 billion average estimate. Snowflake has aggressively expanded its AI capabilities in recent months, including a $200 million partnership with Anthropic PBC to integrate Claude AI models into its platform. Despite these strategic moves, the stock fell as much as 7.9% in extended trading after closing at $265 in New York.

The company's focus on AI has driven significant growth in enterprise adoption, with more than 4,000 customers using Snowflake's AI and machine learning tools weekly. However, the recent weak margin guidance has fueled worries about rising costs associated with AI adoption. Rosenblatt analyst Blair Abernethy raised its price target for Snowflake to $275 while maintaining a Buy rating, citing strong product growth and AI adoption. Meanwhile, Firoz Valliji of Bernstein noted that competition in Snowflake's core market remains a concern.

How the Market Reacted to Snowflake's Guidance

Snowflake's shares have been volatile in recent months, with a year-to-date return of 72% as of early December. Following the weak margin outlook, the stock fell sharply in after-hours trading but partially recovered after the announcement of the Anthropic partnership. The company's stock is currently valued at around $251, with a market capitalization of $85 billion. Analysts remain largely bullish, with an average 12-month price target of about $268. However, some valuation models suggest the stock is overvalued based on discounted cash flow assumptions.

What Analysts Are Watching for the Future

Analysts are closely monitoring Snowflake's ability to balance AI-driven growth with margin pressures. The company recently acquired Datometry to speed up cloud migration, which is expected to help customers transition workloads faster and at lower costs. This acquisition is part of a broader strategy to capture a larger share of the AI-driven enterprise market.

Snowflake is also expanding its presence in AWS Marketplace, where it has doubled its transaction growth to exceed $2 billion in sales this year. This milestone highlights Snowflake's growing importance in enterprise data and AI adoption. The company is also leveraging its partnership with Palantir to strengthen its federal market position.

In addition, Snowflake has announced new integrations with NVIDIA's CUDA-X libraries, enabling GPU-accelerated machine learning workflows within the Snowflake platform. This collaboration is seen as a major catalyst for the company's AI ambitions. However, some analysts caution that the high valuation may leave less room for execution missteps.

Risks to the Outlook

Despite the strong growth narrative, several risks loom over Snowflake's near-term prospects. The company faces intense competition from Databricks and hyperscalers such as AWS and Microsoft Azure. Databricks, in particular, is raising funds at a valuation of over $130 billion, significantly higher than Snowflake's current market cap. This valuation gap underscores the competitive pressure Snowflake faces in the AI and data analytics space.

Snowflake's recent leadership changes also raise questions. The company's new CFO, Brian Robins, brings experience from GitLab but may need time to establish credibility in a high-margin environment. Additionally, the unauthorized comments made by Snowflake's CRO in late October led to short-term volatility. These governance issues highlight the challenges of managing a high-growth, AI-focused company.

Looking ahead, Snowflake's performance will depend on its ability to execute on AI-driven revenue growth while maintaining healthy margins. The company's Q3 earnings, scheduled for December 3, will be a key barometer for investors. Analysts expect earnings of $0.31 per share and revenue of $1.18 billion, with strong net revenue retention and new customer growth as key metrics.