After Earnings, Is Snowflake a Buy, a Sell, or Fairly Valued?

Snowflake SNOW released its fourth-quarter earnings report on Feb. 25. Here’s Morningstar’s take on Snowflake’s earnings and stock.

Key Morningstar Metrics for Snowflake

• Fair Value Estimate

  : $223.00

• Morningstar Rating

  : ★★★★

• Morningstar Economic Moat Rating

  : None

• Morningstar Uncertainty Rating

  : Very High

What We Thought of Snowflake’s Q4 Earnings

Snowflake’s fourth-quarter results easily topped guidance, with revenue growth accelerating to 30% and bookings growth accelerating to 42%. We believe artificial-intelligence-related demand is the primary driver of the company’s recent outperformance.

Why it matters: When enterprise customers want to leverage AI’s power to unlock proprietary data insight, Snowflake’s fully managed development suite can come in handy. Tools such as Cortex AI benefit from their proximity to data, which allows rapid iteration of enterprise AI prototypes.

• Snowflake customers’ interest in data-driven AI applications is much stronger than we expected. Nearly 70% of Snowflake customers are using the platform’s AI features, with almost 20% leveraging Snowflake Intelligence, which became generally available only four months ago.
• We surmise the broad-based AI tailwind is also benefiting competitive offerings like Databricks’ Agent Bricks or Google Vertex AI. In other words, healthy growth momentum does not necessarily earn Snowflake a more favorable position in the enterprise data platform market.

The bottom line: We raise our fair value estimate for no-moat Snowflake to $223 per share from $193, based on a more optimistic growth outlook from AI-induced demand. We think fear around AI’s disruption to database infrastructure is unjustified, leaving Snowflake shares undervalued.

• With Snowflake landing its largest deal in history of over $400 million, we see a clear sign that the company is enjoying higher switching costs. Continued expansion of account size is a prerequisite for Snowflake to develop an economic moat.
• Net revenue retention remained stable at 125% for the third consecutive quarter, boosting our confidence that the company can deliver five-year annualized revenue growth of 24%.

Coming up: For fiscal 2027, management guided a product revenue growth of 27.0% and a non-GAAP operating margin of 12.5%, both of which came slightly ahead of our expectations.

Fair Value Estimate for Snowflake

With its 4-star rating, we believe Snowflake stock is moderately undervalued compared with our long-term fair value estimate of $223 per share, which implies a fiscal 2027 enterprise value/sales multiple of 13 times. We expect Snowflake to achieve a five-year compound annual growth rate of 24%, 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 data infrastructure market, 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 no moat, 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 can maintain 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.

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.

Snowflake also issued $2.3 billion of convertible senior notes in September 2024. Despite a minimal effective interest rate, the potential conversion, when the notes are due in 2027 and 2029, can add to the dilutive effect of Snowflake’s stock-based compensation. 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 that the company can keep its leadership as the market continues to evolve over the next few decades.

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 that do not have robust internal IT expertise but still want to modernize its 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 Rachel Schlueter.