Snowflake Stock Rebounds, Flies Higher on AI Spending

Key Points

• Snowflake stock is staging a rally off its 52-week lows, boosted by being added to Goldman Sach's Americas Conviction List on July 1, 2024.
• Snowflake shares fell from $168.80 to $122.60 after the company missed its fiscal Q1 2025 EPS estimates by 4 cents and lowered its margin and free cash flow guidance.
• The EPS shortfall and lowered guidance stemmed from rising spending on its AI offerings, which helped boost Q1 revenue by 34% YoY and its net revenue retention rate to 128%.

Artificial intelligence (AI) data cloud provider Snowflake Inc. NYSE: SNOW has had a series of misfortunate events, ranging from an earnings miss to data breaches, that caused its stock to tumble to 52-week lows at $122.60 on June 25, 2024. However, the shares have been able to rally for four consecutive days following the low as the market reconsiders its sentiment and ponders whether the sell-off was overdone. Investors should take a closer look at the catalysts to consider stepping into some cheaper shares.

Snowflake Bets Big on AI

Snowflake has been ramping up its generative AI (GenAI) offerings, and it's starting to pay off. Snowflake CEO Sridhar Ramaswamy founded the AI-powered search engine Neeva and is a former Alphabet Inc. NASDAQ: GOOGL Google executive. Ramaswamy was appointed to spearhead and accelerate its AI initiatives. Snowflake continues accelerating investment in AI to enhance its offerings, including its Cortex large language model (LLM).

Data Warehousing: Snowflake Competes with Tech Giants

Snowflake operates in the computer and technology sector. Data warehousing enables companies to gather, store, organize, model, and integrate massive amounts of data in a central repository specially designed for reporting and analysis.

Snowflake competes with hyperscalers that provide data warehousing services, including Amazon.com Inc. NASDAQ: AMZN through its Redshift product, Microsoft Co. NASDAQ: MSFT through its Azure Synapse Analytics and Google BigQuery Cloud Data Warehouse service.

Snowflake’s Q1 Performance: AI Investment and Growth Metrics

On May 22, 2024, Snowflake reported fiscal Q1 2025 EPS of 14 cents versus 18 cents consensus analyst estimates. This was a 4 cent miss. However, the miss wasn’t due to any lack of customer demand. It was due to having to buy more AI GPU chips to support its AI initiatives.

Revenue rose 32.9% YoY to $828.7 million, confirming the company is in its hypergrowth stage. Total customers rose 21% YoY to 9,822. Million-dollar customers rose 30% YoY to 485 in the quarter. Snowflake grew its Forbes Global 2000 customers by 8% YoY to 709.

Snowflake's remaining performance obligations (RPO) grew 46% YoY to $5 billion, which ensures a long runway of future revenue and robust remand. The net revenue retention (NRR) rate was 128%. This means its customers spent 28% more in the quarter than a year ago. Product revenues climbed 34%, which, combined with the NRR, indicates the investment in GenAI is starting to pay off.

Lowered Margins and Mixed Guidance Trigger Snowflake Stock Slide

Snowflakes issued fiscal Q2 2025 product revenues of $805 million to $810 million, representing 26% to 27% YoY growth. The company issues fiscal full-year product revenues of $3.3 billion, representing 24% YoY growth. However, it lowered its non-GAAP operating income margin to 3% from its previous forecast of 6%. It also lowered its adjusted free cash flow margin guidance to 26% from 29%. There is a perception of a slowdown in growth as the 24% full-year product revenue guidance is a step down from the 33% YoY performance in fiscal full year 2024. Again, this is due to the accelerating spending on AI investments like GPUs.

Falling Wedge Breakout in SNOW Stock: Analyzing the Pattern

The daily candlestick chart on SNOW illustrates a falling wedge breakout pattern comprised of converging trendlines representing lower highs and lower lows. The stock slide commenced the following morning after its fiscal Q1 2025 earnings release. SNOW gapped up $168.25 and then proceeded to sell off, forming a gap and crap. Shares continue to cascade lower until they hit 52-week lows of $122.60 on June 25, 2024. A daily market structure low (MSL) triggered the breakout above $130.82, powered by a relative strength index (RSI) divergence low rising to the 56-band as shares rose to $141.49. Pullback support levels are at $27.07, $26.52, $25.61, and $24.50.

Snowflake Customers Targeted By Cybercriminals

Cybersecurity firm Mandiant released a report on June 10, 2024, indicating a cyber threat campaign targeting Snowflake's customer database for data theft and extortion. The report clarified there weren't instances of unauthorized access due to a breach in Snowflake's enterprise environment. Instead, all cases were traced back to compromised customer credentials. Since Snowflake was exonerated, shares didn't have an immediate reaction but continued to sink to 52-week lows after that.

Goldman Sachs Adds Snowflake To its Conviction List

Investment bank Goldman Sachs added Snowflake to its Americas Conviction List on July 1, 2024, propelling shares higher by nearly 5%. Analyst Kash Rangan cited the current levels as an attractive entry point. Rangan noted that CEO Ramaswamy will continue to accelerate product development, resulting in increased velocity and customer consumption, which will ultimately bolster free cash flow and top-line growth.

Snowflake analyst ratings and price targets are at MarketBeat. The consensus analysts' price targets have a 40.67% upside to $199.46.