Snowflake Stock Before Q2 Earnings: To Buy or Not to Buy?

Snowflake SNOW is set to report its second-quarter fiscal 2025 results on Aug 21.

The Zacks Consensus Estimate for revenues is pegged at $848.15 million, indicating an increase of 25.83% from the year-ago quarter's reported figure.

The consensus mark for earnings has been stable in the past 30 days at 15 cents per share. The figure suggests a decrease of 31.82% from the year-ago quarter's levels.

SNOW's earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, the average surprise being 74.84%.

Let's see how things have shaped up for SNOW prior to this announcement.

Factors to Note

SNOW has been suffering from challenging macroeconomic conditions, including persistent inflation, which have hurt customer spending patterns.

Increased GPU-related costs as Snowflake aggressively invests in AI initiatives are expected to have kept margins under pressure. Moreover, stiff competition from the likes of Databricks and increasing pricing pressure.

However, SNOW's top-line growth is expected to have benefited from a strong portfolio with new capabilities, including Marketplace Listing Auto-Fulfillment & Monetization, account replication & failover, Query Acceleration Service, geospatial analytics and Snowpipe Streaming.

SNOW Shares Underperform Sector, S&P 500

Snowflake shares have declined 35.7%, underperforming the Zacks Computer & Technology sector's return of 20.8% and the S&P 500's 16.5%.

Year-to-Date Performance Chart

Image Source: Zacks Investment Research

SNOW stock is not so cheap, as the Value Score of F suggests a stretched valuation at this moment.

The stock is trading at a premium with a forward 12-month P/S of 10.96X compared with the Zacks Computer and Technology sector's 6.36X.

P/S Ratio (F12M)

Image Source: Zacks Investment Research

Expanding Portfolio Aids Long-term Prospects

SNOW has introduced capabilities including Marketplace Listing Auto-Fulfillment & Monetization, account replication & failover, Query Acceleration Service, geospatial analytics and Snowpipe Streaming.

Iceberg tables, Hybrid tables, and Cortex Large Language Model (LLM) and machine learning-powered functions became available in public preview. These capabilities are expected to become generally available in fiscal 2025.

In the fiscal first quarter, Snowflake announced Arctic, its own LLM.

Snowflake's Polaris Catalog is a vendor-neutral, open catalog implementation for Apache Iceberg, which is the open standard of choice for implementing data lakehouses, data lakes and other modern architectures.

The Polaris Catalog offers enterprises and the entire Iceberg community new levels of choice, flexibility and control over their data, with full enterprise security. It offers Apache Iceberg interoperability with Amazon's cloud division Amazon Web Services ("AWS"), Confluent, Dremio, Google Cloud, Microsoft Azure, Salesforce and more.

SNOW is hosting META's Llama 3.1 collection of multilingual open-source LLMs in Snowflake Cortex AI for enterprises to easily harness and build powerful AI applications at scale. It has added new innovations and enhancements to Snowflake Cortex AI that unlock the next wave of enterprise AI for customers with easy, efficient and trusted ways to create AI-powered applications.

Strong Partner Base: A Key Catalyst

SNOW is benefiting from an expanding partner base that includes Amazon, Microsoft, META, NVIDIA, Fiserv, EY, Deloitte, LTIMindtree, Next Pathway and S&P Global, among others.

Its collaboration with NVIDIA will help customers and partners build customized AI data applications in its platform powered by NVIDIA AI.

Snowflake has adopted NVIDIA AI Enterprise software to integrate NeMo Retriever microservices into Snowflake Cortex AI, its fully managed LLM and vector search service. The integration will help enterprises to smoothly connect custom models to diverse business data and deliver highly accurate responses.

Snowflake and Microsoft recently announced an expanded partnership that plans to offer an interoperability experience between Snowflake and Microsoft Fabric OneLake. The interoperability is possible due to their support for the industry's leading open standards for analytical storage formats, Apache Iceberg and Apache Parquet.

Snowflake also announced Snowflake Data Clean Rooms to customers in AWS East, AWS West and Azure West. SNOW leveraged its acquisition of data clean room technology provider Samooha to launch the solution.

Conclusion

Snowflake is a risky bet in the near term, given its modest growth prospect and a stretched valuation.

SNOW's margins are expected to suffer from higher costs, a challenging macroeconomic environment and stiff competition.

Snowflake currently has a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for more favorable entry points in the stock. However, investors who already own the stock might expect the company's growth prospects to be rewarding over a longer term.

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