Snowflake is Melting… Up, With a Double-Digit Upside Potential

Key Points

• Snowflake had a solid quarter and raised guidance for product sales, supported by demand for AI.
• A hint of increased collaboration with NVIDIA helped to support the market. 
• Analysts are raising their targets and leading this stock to the high end of its trading range. 

Snowflake NYSE: SNOW shares have been floundering for the last two years, but those days are ending. The Q1 F25 results were solid, pointing to persistent growth, and the hint of increased collaboration with NVIDIA NASDAQ: NVDA has juiced the market. NVIDIA, the undisputed leader in AI, is already at the heart of Snowflake’s business because of its microchip accelerators and full-stack approach to artificial intelligence (AI) technology. The hint, dropped in a televised interview, is for an increasing number of AI-powered services to meet widespread demand from clients. The takeaway is that Snowflake’s business is gaining new traction that will sustain its growth far into the future, and the market is noticing. 

Analysts' response following the Q1 release is mixed but bullish for the market. The handful of revisions tracked by Marketbeat.com include one lowered, and one reiterated target, but both are above the consensus estimate and imply at least a 25% upside for the stock price. The remaining revisions are all upward; most are above the consensus and lead the market to the high end of the expected range. 

Coincidentally, the previously mentioned reiterated target is from Piper Sandler; it is $240 and the highest target tracked. Highlights from the analysis chatter include kudos for strong execution and an outlook for sustained growth and profitability improvement to improve the valuation. Trading at 266 times this year’s earnings outlook and 150 times next year's outlook, this is a highly valued stock that needs to show steady double-digit growth, if not accelerating. 

Snowflake Stock: Growth Slows, but Outlook Steady

Snowflake reported a strong quarter with revenue of $828.71 million, rising 33% compared to last and outpacing the consensus estimate by 500 basis points. The strength is due to a 34% increase in product sales, the core segment, which accounts for 95% of the business. Strength in product sales is tied to the growth of large customers and increased market penetration. 

Large customers contributing more than $1 million in Trailing Twelve Months (TTM) revenue are up 30% to 485, while the Net Revenue Retention (NRR) or revenue from existing clients is running at 128% of last year’s total. Remaining Performance Obligations (RPO), an indication of future business, is up 46% and suggests growth, despite slowing, will outperform consensus expectations this year. 

The margin is the only area of weakness, but it can be overlooked. The company’s Generally Accepted Accounting Principles (GAAP) earnings of $0.14 are $0.03 weaker than expected due primarily to increased Research and Development (R&D) and ad spending. Both items support current operations and the growth outlook, so they are not red flags. The more important metrics, free cash flow, and adjusted free cash flow are positive and up 40% compared to last year. 

The guidance is good and potentially cautious. The company raised its product revenue guidance to $3.3 billion, a 24% year-over-year increase and below forecasts. The guidance may be cautious because of the increasing availability of AI-powered services and broad demand. 

The Institutions Put a Floor in Snowflake Stock

Snowflake stock is well-supported by institutions. The group owns about 65% of the floated shares and has bought on balance for three consecutive quarters. Their activity coincides with a rising level of support and floor for the market. Assuming this floor holds, shares of Snowflake should move to the top of their trading range soon. 

The technical action is mixed. The stock surged by 5% in pre-market trading and opened with a small gap. However, early action after the opening is bearish, and the market moves lower, creating a solid red candle. If the session closes as is, this market could move down to $150 or lower, regardless of what the analysts say. In this scenario, a move to the bottom of the long-term range near $120 is possible.