Snowflake (SNOW) Stock Soars 16% After Q2 Earnings: Is It Still a Buy?

Snowflake SNOW) shares surged 16% in Thursday’s trading session after the cloud-data leader crushed its Q2 expectations yesterday evening and raised its full-year outlook.

More importantly, Snowflake’s growth is accelerating as artificial intelligence drives greater usage of its AI Data Cloud platform, giving investors plenty to like despite the stock’s increasingly lofty valuation.

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Snowflake Crushes Q2 Expectations

Snowflake posted Q2 adjusted EPS of $0.62, handily topping expectations of $0.45 and rising from $0.35 per share in the prior year quarter. Revenue rose 35% year over year to $1.54 billion, also surpassing estimates of $1.47 billion.

Even more encouraging was product revenue, which climbed 37% to $1.49 billion, marking Snowflake’s third consecutive quarter of accelerating product-revenue growth.

Remaining performance obligations (RPO), representing contracted future revenue, increased 30% YoY to $9 billion, while the number of customers generating more than $1 million in trailing-12-month product revenue jumped 27% to 828.

Notably, Snowflake has surpassed top-line estimates in every quarter since it went public in 2020 and has exceeded earnings expectations for nine consecutive quarters, with an average EPS surprise of 22.77% in its last four quarterly reports.  

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AI Momentum & Raised Guidance

AI is becoming a meaningful growth catalyst rather than simply a long-term opportunity, with management indicating that AI products accounted for roughly half of Snowflake’s recent growth acceleration.

Adoption of its AI coding agent CoCo surpassed 9,100 accounts after adding more than 2,000 during Q2, while CoWork, Snowflake’s agentic workplace offering, reached 5,800 accounts. The company also added 692 net new customers during the quarter.

Reflecting this momentum, Snowflake raised its full-year product-revenue forecast to $6.07 billion, or 36% growth, from $5.84 billion and 31% growth previously.

For Q3, product revenue is projected between $1.588 billion and $1.593 billion, representing another impressive 37%-38% increase. Snowflake also lifted its full-year non-GAAP operating-margin outlook to 14.5% from 13.5%, showing improving profitability alongside accelerating growth.

It's noteworthy that Snowflake's growing enterprise footprint is supported by strategic partnerships with Amazon AMZN), Microsoft MSFT), Alphabet GOOGL), and Nvidia NVDA), helping enterprises deploy increasingly sophisticated data and AI workloads across its platform.

Prominent customers have included Capital One COF), Thomson Reuters TRI), Booking Holdings' BKNG) Booking.com, and DraftKings DKNG).

Snowflake's Premium Valuation

The biggest reason investors may be hesitant to chase today's rally is valuation.

Even before the Q2 post-earnings surge, SNOW was trading at more than 15X forward sales with a forward P/E multiple above 150X.  

Those marks are significantly above its Zacks Internet-Software industry averages of around 4X forward sales and 20X forward earnings, respectively.

Today's 16% jump only expands that premium on a static-estimate basis, although higher revenue and EPS projections following the strong report should help offset some of the valuation expansion.

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Bottom Line

Snowflake’s Q2 results appear strong enough to justify investors' enthusiasm. Accelerating product-revenue growth, rapidly increasing AI adoption, a $9 billion backlog, and raised growth and profitability guidance suggest the company’s fundamental story is getting stronger.

While SNOW's premium valuation could make additional near-term upside more difficult following today's sharp rally, investors with a longer-term horizon may still have reason to remain bullish, especially if AI keeps driving faster platform consumption.

Supporting that outlook, Snowflake stock currently sports a Zacks Rank #2 (Buy), as upward earnings estimate revisions following such an impressive beat-and-raise quarter could further strengthen its investment case.

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This article originally published on Zacks Investment Research (zacks.com).

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