If you’ve been watching the cloud software space, you know Snowflake is one of the major players with its data cloud capturing the hearts of enterprise CIOs and giving growth investors(especially if they bought right after IPO ulcers).
The company just reported its Q3 Fiscal Year 2026 earnings, and it was a classic good news is great but what if we find some tiny nugget of bad news in there situation. The numbers were strong. The guidance was raised. The AI story is booming. And the stock? It took a nosedive. While guidance was up, the market might have been expecting a bit of a bigger beat given that the stock was up almost 70% YTD before the dip.
What is Snowflake, Anyway?
Snowflake acts as the central nervous system for enterprise data. In the old days, companies kept their data in silos—sales data here, marketing data there, product data in a basement server. Snowflake allows businesses to dump all that data into one massive, searchable, analyze-able cloud bucket.
And obviously, like all companies, now they’ve pivoted hard to artificial intelligence. They don’t just want to store your data; they want to help you build AI agents on top of it.
The Stock Chart Check-In
If you bought Snowflake 5 years ago, you might still be feeling the chill(get it, cause it’s a snowflake)? If you bought it a year ago, you’re probably still happy even after the drop.
- 1-Year Performance: ~26%. Despite the post-earnings drop, 2025 has been generally kind to SNOW, riding the tailwinds of the broader AI trade and that’s especially true in 2025 as the stock is up 49.1% YTD.
- 5-Year Performance: ~-39%. Ouch. Since its stratospheric IPO and the 2021 tech bubble peak, Snowflake has been in a long-term cooling phase, trying to grow into its massive valuation. Now if you bought at IPO(at IPO prices of $120, you’re still doing OK) although not a lot of people did that as the stock opened at double that priced, soared for a bit and then proceeded to cool off.
The Earnings Print: Beat, Raise, and… Drop?
On December 3, 2025, Snowflake released its Q3 FY26 results. On paper, it looked like a slam dunk.
- Total Revenue: $1.21 Billion (Up 29% YoY)
- Product Revenue: $1.16 Billion (Up 29% YoY) — The metric that matters most.
- Net Revenue Retention (NRR): 125% — Stable and best-in-class.
- Remaining Performance Obligations (RPO): $7.88 Billion (Up 37% YoY) — This is the backlog of future revenue, and it exploded which seems like good news to me.
- Non-GAAP EPS: $0.35 (Beating estimates of ~$0.31). The Non-GAAP is doing a lot of legwork here as these guys have a ton of stock-based compensation and were sitting a -0.87 EPS on a GAAP basis. They’re still a long ways away from being profitable when accounting for SBC.
The Reaction: Despite beating expectations and raising full-year revenue guidance to roughly $4.45 billion, the market threw a snowball at the stock, sending it down roughly 11% the following day.
It seems like investors were expecting more after having big the stock up 70% YTD. While revenue beat, it wasn’t quite the beat many expected and a sell off happened which is often the case for companies that are valued so highly. On top of that, the guidance for Q4 operating margin (7%) looked a bit soft compared to the Q3 print (11%). In this market, you sometimes have to be better than perfect.
The Good, The Bad, and The AI
Let’s break down what’s actually happening under the hood.
What’s Going Well
- AI is Real Revenue: CEO Sridhar Ramaswamy had some good news: Snowflake’s AI business has already hit a $100 million annualized revenue run rate. Customers are starting to pay for it. It’s still far from being a massive contributor to the top line but hopefully they have more news around growth rates here in the next few quarters and guidance.
- Whale Hunting: They closed four 9-figure deals in the quarter. That’s four different customers committing over $100 million each.
- Snowflake Intelligence: Their new agentic AI product (think chatbots that can actually do work, not just talk) is seeing the fastest adoption of any product in company history. Don’t play any drinking games around how often you hear AI or agentic on these calls or your liver will explode.
- RPO Acceleration: RPO growing at 37% (faster than revenue) suggests that future revenue growth might re-accelerate. It’s a massive leading indicator of demand.
What’s Going Poorly
- The Profitability Question: Snowflake is still losing money on a GAAP basis (Net loss of $294 million this quarter). While they generate free cash flow(mostly because of the high SBC not being a cash cost), investors are getting impatient for real, unadjusted profits.
- Margin Pressure: The company is hiring aggressively and investing in AI hardware (GPUs are expensive!). This puts pressure on margins, spooking investors who want efficient growth.
- Consumption Volatility: Snowflake runs on a consumption model (pay for what you use). This can be lumpy. A single hyperscaler outage cost them $1-2 million in revenue this quarter. It’s hard to model perfectly.
The Analyst Q&A: Reading Between the Lines
During the earnings call, Wall Street analysts grilled management.
The Question: “You beat revenue, but your margin guide for next quarter is lower. Are expenses spiraling?”
The Answer: Management front-loaded some hiring this year, and Q4 is always tricky with holiday seasonality and they aren’t changing their long-term margin targets.
The Question: “AI revenue is at $100M. Is that new money, or just cannibalizing old spend?”
The Answer: It’s seems to be new value. They are seeing products like Snowflake Intelligence open doors that were previously closed. It’s helping them win new customers (almost 50% of new wins involved AI). It’s not just shifting buckets; it’s expanding the pie.
The Question: “Are companies actually migrating off legacy systems, or is that slowing down?”
The Answer: Management claims it’s accelerating. They see AI as a catalyst. People want to move data to the cloud so they can use AI on it. Their claims is that we are barely 15-20% into the global migration from on-premise to cloud and there’s a long runway ahead.
Is it a Buy?
Snowflake is a battleground stock with bulls and bears fighting it out every other month. The results are good but is the valuation just too crazy?
The Bear Case: It’s expensive. Trading at roughly 15x forward sales, it is one of the priciest stocks in software and that’s after falling in the last 5 years. If growth slows even a little, the valuation has a longer way to fall. The lack of GAAP profitability in a high-interest-rate environment is a red flag for conservative investors.
The Bull Case: This is a great tech infrastructure company. They have a retention rate (125%) that is the envy of the industry. The acceleration in RPO (+37%) suggests growth isn’t slowing; it’s heating up. The drop in stock price post-earnings may feel like a knee-jerk reaction to conservative guidance, ignoring the massive underlying strength of the business and a beat next quarter may be a short-term catalyst that sends the stock price back up.
The Bottom Line: The execution risk here is high. Despite growing at a rapid pace the last 5 years and falling during the same period, the stock is still valued very richly. They are not making money and while free cash flow is positive, it includes 1.6B in stock-based compensation in the last 12 months which is why operating income and GAAP EPS is negative and will likely be for the foreseeable future. At an 18x trailing sales multiple and a 15x forward sales multiple, it’s still expensive despite the dip and will require many years of 20%+ growth and impeccable execution to get there. Right now the market is expecting 20%+ growth into 2030 and that’s a steep hill to climb and any misses in that timeline will send this stock falling. Unless you fully believe in this business, this one is still too expensive and a pass for me. If it falls some more and drops into the mid 100s again, I’ll certainly pick some up then.
Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. The author is not a registered investment advisor. All investment strategies and investments involve risk of loss. Nothing contained in this article should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit. Please consult with a professional financial advisor before making any investment decisions.
