AI tool's profitability called into question Snowflake (SNOW.US) weak guidance triggers stock price plunge

Snowflake (SNOW.US) reported better-than-expected third quarter financial results on Wednesday. However, the company's operating profit margin outlook was lower than analysts' expectations, and its product revenue forecast failed to meet investors' expectations for higher growth rates, leading to concerns about the profitability of its new artificial intelligence (AI) tools. As a result, the company's stock price dropped after hours. According to the financial report, in the third quarter ending October 31, the company's revenue was $1.21 billion, higher than analysts' previous estimate of $1.18 billion. Product revenue grew by 29% year-on-year to $1.16 billion, accounting for approximately 95% of the company's total revenue, exceeding the general expectation of around $1.14 billion. The remaining performance obligations, a measure of order backlog, increased by 37% to $7.88 billion, higher than analysts' estimate of $7.23 billion. Adjusted earnings per share were $0.35, also higher than analysts' estimate of $0.31. However, looking ahead, the company expects an adjusted operating profit margin of around 7% for the fourth quarter ending in January, lower than the average analyst expectation of 8.5%. Product revenue is expected to be approximately $1.195-1.2 billion, with a 27% year-on-year growth, just slightly higher than the average expectation of $1.19 billion. "Given the significant rise in the stock price this year, investors were originally expecting the company to provide guidance for over 30% growth," said D.A. Davidson analyst Gil Luria. "But we believe this growth will be realized in the next quarter, continuing to drive the stock price higher." After the financial report was released, the company's stock price fell more than 9% in after-hours trading, but partially recovered after announcing a partnership with Anthropic. The stock has gained 72% so far this year. As demand for data organization, storage, and security grows among businesses, Snowflake, which focuses on developing cloud-based enterprise data organization, analysis, and storage software, continues to benefit from the expansion of AI demand. Since Sridhar Ramaswamy became CEO in early 2024, the company has been focusing on integrating AI tools and data within its platform, and has completed four acquisition deals this year to strengthen this strategic layout. On Wednesday, the company also announced a $200 million partnership with Anthropic PBC to integrate the startup's Claude AI model into its platform. However, since reaching a high of $277.14 on November 3, the stock price has fallen. Recently, tech stocks have continued to face concerns in the market about an AI bubble despite continued large investments by companies, significant substantial returns have not yet been achieved. In addition to concerns about a bubble, investors are also closely watching the competitive pressure faced by Snowflake, especially in competition with companies like Databricks. According to reports in November, Snowflake's main competitor, private data software provider Databricks, is in discussions for a new round of financing, with a valuation expected to exceed $130 billion. If this valuation is achieved, the market value of the startup will be significantly higher than Snowflake's market cap of $89.7 billion at the close on Wednesday. Bernstein analyst Firoz Valliji said before the financial report was released, "In the long term, the innovative initiatives and execution focus under the new CEO leadership are encouraging, but we are still concerned about the increasingly fierce competition in the core market." However, Luria from D.A. Davidson is not worried about this. "In the current software industry environment, Snowflake is experiencing significant tailwinds, and the threat posed by Databricks is limited," he further added, "We continue to understand that while the two businesses overlap, they each have wide opportunities for development."