Snowflake's Growth Is Accelerating. So Is the Valuation Risk

Snowflake Inc. (SNOW, Financials) is giving investors almost everything they could want from an AI software company. The problem is the cost. Shares jumped 17% after Snowflake posted fiscal second-quarter product revenue of $1.49 billion, up 37% year over year. Total revenue was up 35 percent to $1.55 billion. Growth is also picking up. That was the third consecutive quarter of accelerating product-revenue growth and adjusted earnings of $0.62 a share topped the $0.45 consensus estimate. AI is a help. AI accounted for about half of the recent acceleration, CEO Sridhar Ramaswamy said, and Snowflake's CoCo coding assistant has more than 9,100 accounts already. And customers also are shopping more. We had 126% net revenue retention and $9 billion in remaining performance obligations. The number of clients spending more than $1 million annually rose to 828. Management responded by boosting full-year product revenue guidance to $6.07 billion from $5.84 billion, implying around 36% growth. That's the good news. 'The valuation is the harder part. Snowflake trades at about 152 times the current consensus estimate for adjusted earnings in fiscal 2027. Even based on consensus fiscal 2030 earnings of $5.86 a share, today's price is about 58 times earnings almost four years out. There's not much room for disappointment. 'Snowflake is showing how standard artificial intelligence can drive real consumption growth.' Today, investors are pricing that growth as if it will remain extraordinary for years. The next test will be whether product-revenue growth can stay in the high 30% range while margins improve fast enough to justify the premium.