Snowflake Earnings: Margin Pressure Unlikely to Ease Anytime Soon as Competition Remains High

Key Morningstar Metrics for Snowflake

• Fair Value Estimate: $193.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Snowflake’s Earnings

Snowflake’s SNOW third-quarter revenue growth of 29% was slightly ahead of guidance. However, shares sold off up to 9% in after-hours trading, likely due to a disappointing fourth-quarter non-GAAP operating margin guidance of 7%, or nearly 400 basis points below this quarter’s result.

Why it matters: We like the cadenced growth trajectory Snowflake has been posting recently. Go-to-market motion remains healthy, with the company adding a record 615 new customers and closing four nine-figure deals in the quarter.

• In addition, a strong net retention rate of 125% and a more than 40% attendance increase at Snowflake’s developer summit are positive signs of customer engagement, potentially leading to switching costs that support an economic moat.

The bottom line: We lift our fair value estimate for no-moat Snowflake to $193 from $177, based on increased near-term revenue guidance. We continue to see shares as overvalued.

• As enthusiasm for artificial intelligence has tapered, companies’ unit economics have been under closer scrutiny from investors. We wouldn’t be surprised if we see such margin disappointment again for Snowflake, driving its share price toward our fair value estimate over the long term.
• Competition is still high in the analytical database market as enterprises contemplate the optimal tech stack for their data needs. Snowflake’s public company status also puts it at a disadvantage because of the obligation to provide more financial transparency than its biggest competitor.

Coming up: Fourth-quarter revenue growth guidance of 27% is in line with the trend from previous quarters. Despite an underwhelming quarterly margin guidance, full-year non-GAAP operating margin guidance is stable at 9%.

Key stats: We’re happy with Snowflake’s $1 billion bookings addition this quarter, bringing year-over-year remaining performance obligations growth to 38%, which underscores enterprises’ interest in AI infrastructure investments and should provide a lasting growth tailwind.