Is Snowflake Stock a Good Investment After Recent Surge?

Snowflake (NYSE: SNOW) has had a challenging year, with its stock down 11% in 2024, significantly lagging behind major market indices. However, things have taken a positive turn recently. After reporting impressive results for its third quarter of fiscal year 2025, which ended on October 31, Snowflake's stock experienced a remarkable increase of over 30% in just one trading day.

While some investors may feel they missed the opportunity due to the steep one-day rise, there are indications that this performance could indicate a more enduring trend for the company. But does this mean it’s a wise time to invest?

Strong Demand for Snowflake’s Data Cloud Amid AI Growth

Snowflake’s primary focus is on data management. Its cloud product provides businesses with the essential tools needed for collecting, storing, and processing data. This service is increasingly vital, especially now as data becomes crucial for training artificial intelligence (AI) models.

To enhance its capabilities in AI, Snowflake formed a partnership with Amazon Web Services (AWS) to integrate Anthropic's Claude model into the Snowflake platform. This collaboration is significant in the current business landscape, where companies are eager to leverage AI for improved performance. With a customer base exceeding 10,000 clients, Snowflake is poised to increase revenue significantly, especially through its partnered offerings.

During Q3 FY 2025, Snowflake achieved a 29% year-over-year increase in product revenue, reaching $900 million. This figure is impressive and does not yet reflect potential earnings from the new partnership with Anthropic. Moreover, a key metric for investors, known as remaining performance obligations (RPO), rose dramatically by 55% to $5.7 billion. This growth suggests that Snowflake's revenue potential might be more sustained than previously anticipated.

Concerns About Profitability and Slowing Growth

Despite positive indicators like a rising RPO, there are concerns regarding Snowflake's profitability. Management forecasts that product revenue growth will slow to 23% in Q4. This trend indicates a potential maturation phase for the company, which could hinder its high growth rates.

Furthermore, Snowflake reported an operating loss of $366 million for the quarter, translating to a 39% loss margin. Alarmingly, this margin has remained unchanged over the past few years, highlighting a persistent challenge in managing expenses efficiently as growth slows.

This lack of focus on profitability in a decelerating growth situation raises concerns. It suggests a management philosophy that may not prioritize generating profits for shareholders, which is unsettling. While this does not spell doom for the company, it certainly alters the perception of its investment prospects.

As a current shareholder, I am considering using this recent surge to either reduce my investment or exit the position altogether. With a premium valuation—trading at 17 times its sales—coupled with the hesitance to pivot towards profitability, it might be prudent to look elsewhere for investment opportunities. Several other high-growth tech firms are already achieving profitability, showing that it is possible for companies in this sector.

Snowflake, Stocks, AI