SNOW Earnings Preview: What to watch
3min read Snowflake (SNOW) is set to report its Q3 earnings on November 20 after market close, with analysts anticipating EPS of $0.15 and revenue of $899.31 million, according to FactSet. This earnings report comes against a backdrop of cautious investor sentiment as the company has faced slowing growth, concerns about competition, and mixed reactions to its evolving product portfolio. Analysts expect a beat-and-raise scenario, with Truist highlighting that Snowflake may benefit from stabilizing demand and upside potential related to its new initiatives despite a challenging macro environment.
Key drivers for the quarter include Snowflake's product revenue, which is expected to grow at a slower year-over-year rate, and the potential impact of its Iceberg table functionality. While the rollout of Iceberg may allow some customers to reallocate storage off Snowflake's platform (potentially impacting revenue), analysts believe the long-term benefits of this feature, which enables broader data interoperability, could offset these headwinds. Moreover, the company's expanded partnership with Microsoft, allowing for enhanced AI and data cloud functionalities, could bolster its competitive positioning and support revenue growth.
Guidance will be critical as Snowflake aims to reassure investors about its long-term growth prospects. The company raised its FY25 product revenue guidance slightly after Q2, but the conservative nature of its Q3 outlook has left room for skepticism. Analysts like Citi expect a modest raise in the implied Q4 guidance, supported by stabilizing hyperscaler demand and growing adoption of AI products like Cortex. Snowflake's ability to demonstrate the traction of new AI-driven offerings will be closely monitored, especially as its competitors like Databricks ramp up their own capabilities.
Another point of interest is Snowflake's strong financial position, highlighted by its recent $2 billion convertible notes offering. This move provides additional capital to accelerate platform development, fund strategic investments, and support its share repurchase program, adding to the $3.92 billion in cash already on its balance sheet. Analysts view this as a positive signal, showing the company’s commitment to maintaining financial flexibility while investing in its growth.
On September 23, Snowflake announced its plan to use proceeds from a convertible notes offering for various purposes. These include funding capped call transactions, repurchasing up to $575 million in common stock through private transactions with note purchasers, and general corporate purposes. Additionally, the company may use funds for stock repurchase programs, acquisitions, or strategic investments, though no specific acquisitions or investments are currently planned. If additional notes are issued, Snowflake intends to allocate part of the proceeds to additional capped call transactions and the remainder to general corporate activities.
The stock's valuation and investor sentiment remain in focus. Despite a 41% decline year-to-date and a 73% fall from its 2020 peak, Snowflake’s long-term potential continues to attract bullish calls from analysts. Monness Crespi & Hardt and TDCowen have upgraded their outlooks, citing Snowflake’s innovation pipeline and improving growth trends. With a price-to-sales ratio of around 10x, the stock's ability to justify its premium valuation will depend heavily on Snowflake’s ability to execute its strategy and deliver tangible progress in AI-driven solutions and enterprise adoption.
Snowflake's Q2 earnings report reflected a mix of positive and concerning trends, setting the stage for its Q3 release after the market close today. Snowflake delivered adjusted EPS of $0.18, surpassing the consensus of $0.16, and revenue of $868.8 million, which exceeded estimates of $851.3 million. However, its product revenue growth of 30% year-over-year was slower than in prior quarters, a concern given its premium valuation. The company raised its FY25 product revenue guidance by $56 million to $3.356 billion, yet this fell short of investor expectations, given its ambitious growth targets and high price-to-sales ratio of 10.5x.
A major area of focus was Snowflake’s Q3 product revenue guidance of $850-$855 million, equating to year-over-year growth of 22%, a marked slowdown from the 30% growth in Q2. This deceleration, combined with reaffirmed non-GAAP operating margin guidance of 3% for FY25, despite exceeding this target in Q2, left investors concerned about its profitability trajectory. Analysts also flagged rising expenses, particularly R&D costs, which jumped 39% year-over-year to $437.7 million as the company ramped up investments in AI-related offerings such as Snowpark and Cortex.
On the brighter side, Snowflake showcased strong momentum in its AI initiatives, with Snowpark beginning to contribute meaningfully to its top line. The company estimates $100 million in FY25 product revenue will stem from Snowpark, which enables seamless AI and machine learning model deployment. Remaining performance obligations (RPO) grew 48% year-over-year to $5.231 billion, signaling robust long-term demand, while its net revenue retention rate of 127% highlighted its ability to expand within its existing customer base.
Despite these positives, the stock experienced significant selling pressure, dropping 9.5% in the aftermarket following its earnings release. Analysts cited slowing product revenue growth, increased expenses, and the lack of meaningful margin expansion as key concerns, particularly given Snowflake’s competitive market and lofty valuation. The company’s ongoing rivalry with Databricks, a major player in the data and AI space, was also noted as a driver for its substantial investments in product innovation and go-to-market strategies.
Snowflake’s leadership defended its investments, emphasizing the long-term value of AI and new product development. CEO Sridhar Ramaswamy underscored the importance of building infrastructure for future growth, even at the expense of near-term margins. Analysts offered mixed reactions, with some maintaining optimistic price targets in the $160-$190 range, while others lowered their expectations, citing a tougher growth trajectory in the second half of FY25.
Looking ahead to Q3, investors will closely watch Snowflake’s ability to meet or exceed its product revenue guidance of $850-$855 million and whether AI initiatives like Cortex and Snowpark can provide meaningful offsets to slowing core growth. Additionally, the focus will remain on its margin performance and any updates on R&D spending as the company navigates an increasingly competitive landscape.
While Snowflake's business fundamentals remain strong, including its sticky customer base and expanding use cases in AI, the stock’s rich valuation leaves little room for error. Tonight’s Q3 results will likely determine whether Snowflake can rebuild investor confidence and justify its high-growth narrative in the face of mounting competitive and macroeconomic pressures.