Is Snowflake a Buy After Its Stock Soared 30%?

Snowflake (NYSE: SNOW) isn't having the best of years. The stock is down 11% in 2024, by far underperforming major indices. But it used to be much worse. Snowflake stock is actually up big in the last month after it reported blowout figures for its third quarter of fiscal year 2025 (ending Oct. 31). After that report, the stock surged over 30% the following trading day.

Some may view that as missing the move, as it was an enormous rise in just one day. However, there are signs that this could be a long-term trend for Snowflake. But is it enough to make it a buy now?

Snowflake's data cloud is still seeing strength as AI booms in popularity

Snowflake is all about data. Its data cloud product provides its customers with the infrastructure to help manage data collection, storage, and processing. This is incredibly important right now, as this data is becoming key to training artificial intelligence (AI) models.

To help bolster its AI prowess, Snowflake partnered with Anthropic to bring its Claude model onto the Snowflake platform through Amazon Web Services (AWS). This partnership is significant in a world where every company is trying to see how AI benefits its business. With Snowflake's massive customer base of over 10,000 clients, it already has a strong relationship with many customers and could see more revenue come from each of those customers with the Anthropic partnership.

In Q3 FY 2025, product revenue rose 29% year over year to $900 million. That's an impressive figure -- and doesn't even reflect any gains to come from the Anthropic partnership. But there is one figure that really blew investors' minds. Snowflake's remaining performance obligations (RPO) measure how much revenue is yet to be realized from signed contracts. Its RPO rose 55% to $5.7 billion, meaning its growth rate should stay elevated longer than most investors were expecting.

This metric caused Snowflake's stock to rise, and for good reason. However, a few other sticking points with Snowflake may cause investors to reconsider.

Snowflake's profits are nowhere to be seen

Even with the bump in RPO, Snowflake's growth is slowing. In Q4, management expects product revenue growth of 23%. This is a continuation of a trend of a business whose growth is slowing as the company becomes more mature.

SNOW Operating Revenue (Quarterly YoY Growth) data by YCharts

The problem is that Snowflake is acting like a company whose growth is accelerating. Snowflake's main problem lies with its operating expenses, as it posted an operating loss of $366 million in the quarter -- a 39% loss margin. Despite Snowflake's slowing growth, this margin hasn't changed at all over the past few years.

SNOW Operating Margin (Quarterly) data by YCharts

This is a huge problem, as Snowflake is starting to lose the growth it needs to become profitable. Instead, it will likely have to make drastic compensation cuts to achieve this goal.

The lack of emphasis on profitability with slowing growth is a huge red flag for me, as it shows that the management team places hardly any value on profits -- which isn't good for shareholders. While this doesn't doom Snowflake by any means, it reshapes Snowflake's investment picture.

Although I currently own shares of Snowflake, I may use this bump as an opportunity to exit the stock or at least reduce my exposure to it. High-growth software companies eventually need to turn a profit, and with Snowflake still trading at a premium valuation (17 times sales), it may be time to move on. Many other high-growth software companies are generating strong profits, and there's no reason why Snowflake can't follow their model.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Amazon and Snowflake. The Motley Fool has positions in and recommends Amazon and Snowflake. The Motley Fool has a disclosure policy.