Amid high expectations, revenue growth slows and software giant Snowflake’s stock plunges.

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Cloud data management company Snowflake's operating profit margin failed to meet Wall Street expectations, raising market concerns about the profitability of its AI tools.

Financial results released by Snowflake on Wednesday showed that its adjusted operating profit margin for the third fiscal quarter was about 7%, lower than the Bloomberg-compiled analysts' average expectation of 8.5%. Product revenue was about $1.2 billion, higher than the market expectation of $1.19 billion.

The profit margin falling short of market expectations triggered investor sell-offs, with the stock price plummeting 8.25% after hours, though it is still up 72% year-to-date. Although the company subsequently announced a $200 million cooperation agreement with Anthropic, the share price still failed to fully recover its losses.

The company’s product revenue in the third quarter increased 29% year-over-year to $1.16 billion, with growth slowing compared to previous periods. Product revenue accounts for about 95% of total revenue, and the slowdown is seen as a sign of weakening business expansion momentum. Although the key indicator of remaining performance obligations rose 37% year-over-year to $7.88 billion, exceeding analysts’ expectations of $7.23 billion, the market is more concerned with profitability than backlog.

Profit Margin Triggers Market Concerns

The operating profit margin outlook provided by Snowflake was the direct trigger for the share price decline. The 7% adjusted operating profit margin target was not only lower than analyst consensus, but also highlighted the cost pressures the company faces in its AI transformation process.

Since the new CEO Sridhar Ramaswamy took office at the beginning of 2024, the company has completed four acquisitions this year, mainly to strengthen AI-related capabilities. These investments have obviously dragged down profit margin in the short term.

On Wednesday, the company also announced a $200 million collaboration agreement with Anthropic, integrating Anthropic's Claude AI model into the Snowflake platform. After this news was released, the share price pulled back some losses, but investor concerns about returns on AI business investments did not completely dissipate.

Snowflake’s third-quarter product revenue was $1.16 billion, and adjusted earnings per share were $0.35, beating analysts’ expectations of $0.31 per share and $1.14 billion in product revenue, but investors are more worried about the future growth potential.

Competitive Pressure Continues to Intensify

Doubts about Snowflake’s valuation in the market partly stem from a worsening competitive environment. According to a November report by The Information, its main competitor, unlisted Databricks, is in talks to raise funds at a valuation exceeding $130 billion, which would be significantly higher than Snowflake’s public market valuation.

Bernstein analyst Firoz Valliji wrote before the earnings release: "In the long term, we are encouraged by the innovation and execution under the new CEO. However, we remain concerned that competition in its core market is intensifying." Snowflake helps companies organize, analyze, and store data in the cloud, but its core business is facing more and more challengers.

BNP Paribas analyst Stefan Slowinski said that Snowflake's share price has risen more than 70% this year, far outperforming peers, so "the bar has been set very high," making the post-earnings share drop unsurprising. As of Wednesday’s close, the company had a market capitalization of $89.7 billion.

Although it has maintained considerable gains for the year, the combined challenges of profit margin pressure and increased competition are testing investors’ confidence in this cloud data giant.

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