Snowflake Stock Is on Fire. But Can the Momentum Last?

Yahoo

3 days ago

Key Points
Management is investing aggressively in key growth opportunities.
Investors love Snowflake's emphasis on AI.
The stock's valuation is questionable.
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With artificial intelligence (AI) seeming to be one of the major investing themes of 2025, it's no surprise that AI and data platform specialist Snowflake (NYSE: SNOW) has seen its shares soar this year. As of this writing, the stock is up nearly 40% year to date. This is far ahead of the S&P 500's rise of about 7%. Investors love the tech company's increased focus on AI and its rapid revenue growth.
But have investor expectations risen too high? After all, the company is still reporting massive quarterly losses, even as its market capitalization sits at about $72 billion.
A true growth stock
To be fair, Snowflake's losses are intentional. As Snowflake CEO Sridhar Ramaswamy stated during the company's most recent earnings call (the first quarter of fiscal 2026), Snowflake is investing "aggressively in growth."
Just as is the case with most growth stocks, today's investments are about the future.
"We are building our strength in executing with urgency and focus to capture the opportunities ahead and sustain durable momentum," the CEO added.
As long as the company continues growing rapidly, investors will likely be forgiving when it comes to losses. After all, Wall Street hopes Snowflake can grow at high rates for years to come.
Fiscal first-quarter product revenue, which rose 26% year over year to nearly $1 billion, was notable. Importantly, the growth rate was far higher than what management had guided for. Going into the quarter, the company had stated that it expected product revenue to increase 21% to 22% year over year. The big difference in Snowflake's reported growth and management's guidance is likely one reason the stock has done so well this year.
Importantly, management believes the AI and data platform company's business momentum will remain strong in fiscal Q2. The company's guidance was significantly more upbeat this time around, with management forecasting 25% year-over-year revenue growth for the period.
Show me the money
While it's great to see Snowflake's revenue growing rapidly and management guiding for more of the same in fiscal Q2, investors shouldn't ignore the company's disappointing bottom line. The company's net loss is moving in the wrong direction. First of all, Snowflake's fiscal first-quarter net loss was $430 million -- much worse than its $318 million loss in the year-ago quarter. Even worse, however, is how Snowflake's net loss is shaping up as a percentage of revenue. The loss amounted to 41% of revenue in the first quarter of fiscal 2026, up from 38% of revenue in the year-ago period.
Until Snowflake's losses begin to improve rapidly, measured as a percentage of sales, investors have the right to be concerned about the sustainability of the tech company's business model.
Snowflake's lack of operational leverage to date, therefore, makes the tech stock one worth avoiding for now. Simply put: Shares look overvalued. Sure, it's possible that the stock's momentum persists and investors who don't buy the stock today miss out. But given how significant Snowflake's losses are relative to its substantial market capitalization of about $72 billion at the time of this writing, it makes sense to hope for a significant pullback in the stock price before taking a position in this growth story.
Of course, investors might want to consider paying up for Snowflake's premium valuation if the company begins to demonstrate consistent and clear operating leverage. If the company can pull this off, shares could continue to rise faster than the S&P 500. But this is a big if. Unless this occurs, investors should remind themselves that it's perfectly fine to admire a business while avoiding the stock. Price matters. Unfortunately, this growth stock is priced for perfection, even as its bottom line is moving in the wrong direction.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.
Snowflake Stock Is on Fire. But Can the Momentum Last? was originally published by The Motley Fool