Is Snowflake (SNOW) a Buy Despite Valuation Concerns?

Snowflake (SNOW) has long been a poster child for the cloud data revolution, but its valuation has drawn scrutiny even as the company continues to deliver robust growth. With Q3 2025 results underscoring its momentum and a mixed analyst outlook, investors face a critical question: Can Snowflake's earnings trajectory and market leadership justify its current price tag?

Growth and Earnings Momentum: A Story of Resilience

Snowflake's Q3 2025 performance reinforced its position as a leader in the cloud data warehousing space. Revenue surged 29% year-over-year to $1.21 billion, outpacing estimates by 2.4% to 2.68%, depending on the source. Non-GAAP earnings per share (EPS) of $0.35 exceeded forecasts by 12.5%, while adjusted operating income hit $131.3 million-a 21.3% beat-driven by a non-GAAP operating margin of 10.8%, up from 5.1% in the prior quarter.

The company's product revenue of $1.16 billion grew at the same 29% rate, and its net revenue retention rate held steady at 125%, a testament to customer loyalty. Notably, Snowflake added 615 new customers, including 688 paying over $1 million annually, signaling broad-based adoption. Looking ahead, the firm raised its full-year 2026 product revenue guidance to $4.446 billion, implying 28% year-over-year growth. This trajectory suggests Snowflake is capitalizing on the AI-driven demand for data analytics, a trend likely to persist.

Valuation: High Multiples, But Is It Justified?

Snowflake's valuation remains a double-edged sword. Its price-to-sales (P/S) ratio of 22.33 is 33% above its 12-month average and 19.7% above its 3-year average. While this exceeds the U.S. IT industry's P/S ratio of 2.1x, it is lower than the peer average of 18.5x, suggesting it is not an outlier in its sector.

However, the company's price-to-earnings (P/E) ratio is negative (-58.11), reflecting ongoing unprofitability. This aligns with historical trends, as Snowflake has averaged negative P/E ratios over the past year. In contrast, the broader IT sector trades at a P/E of 38.26, a level deemed overvalued relative to its 5-year average. Meanwhile, enterprise software peers typically command higher valuations, with M&A multiples for IT services averaging 1.3x EV/Revenue and 10.2x EV/EBITDA.

The disconnect lies in Snowflake's ability to grow revenue at 31.78% annually, a pace that could eventually justify its multiples. Yet, with a P/S ratio 10x higher than the IT sector average, investors must weigh whether this growth is sustainable enough to offset current unprofitability.

Analyst Sentiment: Caution Amid Optimism

Analysts remain divided but cautiously optimistic. The 12-month average price target of $275.05 implies ~19.89% upside from current levels, while institutional investors have been net buyers of Snowflake stock in 2025. This suggests confidence in the company's long-term potential, particularly as AI adoption accelerates demand for cloud data infrastructure.

However, the negative P/E ratio and elevated P/S ratio highlight risks. If revenue growth slows or margins fail to improve, the stock could face downward pressure. Conversely, continued execution on its AI and cloud strategy could validate the high valuation.

Conclusion: A Buy for the Patient, Growth-Oriented Investor

Snowflake's Q3 results and revised guidance underscore its dominance in a critical tech sector. While its valuation metrics-particularly the P/S ratio-appear stretched relative to industry benchmarks, the company's earnings momentum and customer growth provide a buffer. For investors with a long-term horizon and a tolerance for volatility, Snowflake's combination of market leadership and AI-driven tailwinds could justify the current price.

That said, the stock is not without risks. A slowdown in cloud spending or margin compression could test its multiples. For now, the data suggests Snowflake remains a compelling buy for those who believe in the enduring power of cloud data analytics.