According to the Smart Finance app, as of Thursday's close, the leader in the cloud data warehouse sector, Snowflake (SNOW.US), saw a significant drop in its stock price, down nearly 15%. Despite the overall better-than-expected performance, Wall Street analysts remain cautious about the company's future performance and potential stock price momentum, mainly because Snowflake's growth prospects in the AI software tool market have not been widely recognized by institutional investors.

Wall Street's major bank, Morgan Stanley, maintains a 'hold' rating on Snowflake, with a target price of $175 (Snowflake closed at $115.210 on Thursday), and points out that while the company's overall performance for the second quarter of fiscal year 2025 is optimistic, it is still not enough for the market. The company's performance guidance and the revenue prospects for AI products have yet to convince investors.

Morgan Stanley's analysis team, led by Keith Weiss, pointed out that the degree of outperformance of product revenue and actual growth has further slowed down, and the performance outlook shows a significant slowdown in expected growth, which lacks the catalyst needed to reverse investors' bullish sentiment towards Snowflake.

They pointed out that the weakening headwinds and the emergence of new product plans should support growth, but potential investors may need more specific signals of optimistic performance growth.

Uncertain prospects for AI revenue

For the second quarter of fiscal year 2025, which ended on July 31, the company's adjusted EPS and total revenue exceeded market expectations. However, due to the continuous investment in AI by the company and the rising costs, losses have also expanded, and the revenue data and prospects for AI-related products are still very uncertain.

Snowflake's cloud data warehouse platform has been used by many companies to store and manage internal or customer data. By introducing new generative AI capabilities, Snowflake is expected to further enhance the functionality of its cloud data warehouse platform, enabling enterprise customers to manage corporate data in a more efficient and convenient manner, as well as helping them effectively utilize data for AI model training and cloud-based inference and deployment.

Therefore, Snowflake's expansion in the field of AI is seen as a huge opportunity, especially in the combination of cloud data warehousing and generative AI technology. However, these expansions also bring high R&D and operating costs. Without corresponding profit returns, high investments may further compress the company's profit margins, which is a concern for investors. Snowflake's stock price has performed poorly, lagging far behind cloud computing industry leaders such as Amazon AWS and Microsoft, clearly indicating investors' dissatisfaction with the company's progress in generative AI and revenue prospects.

With its position as a major shareholder of OpenAI, Microsoft has embedded OpenAI's pride and joy, the GPT-4 AI model, in its flagship applications such as the Office suite and Microsoft Azure cloud platform, making it a global leader in AI applications. Driven by AI revenue engines, Microsoft's performance and stock price have been continuously increasing since 2023. Recently, Microsoft has also hired most of the employees of AI startup Inflection AI. Cloud software giant Salesforce Inc. has also invested in multiple AI startups, striving to continuously integrate generative AI technology into client-side software applications. Databricks, typically considered one of Snowflake's core competitors, has also released its own open-source large-scale language model and acquired AI startup MosaicML for 1.3 billion dollars last year.

Snowflake expects its product revenue for October to be between 0.85 billion and 0.855 billion dollars, which is higher than the average analyst forecast of 0.848 billion dollars. In addition, the company has raised its overall product revenue forecast for the fiscal year from 3.3 billion dollars to 3.36 billion dollars.

Analysts have stated that a 30% year-on-year growth in product revenue for the second quarter is solid, but it is the first time since going public that Snowflake's total revenue growth rate has fallen below 30%.

Analysts add that although the upward revision is encouraging, the overall trajectory of growth deceleration may not address existing bearish concerns surrounding intensified competition. However, they believe that the opportunity for core data warehousing remains intact and new initiatives impacting the generative AI field may be realized in the 2026 fiscal year.

Weiss and his team note that they still maintain a "hold" rating on the stock and look forward to more positive growth data.

Around the current stock price, the tug-of-war between the bulls and bears shows no signs of stopping.

At the same time, renowned investment firm Evercore maintains a "outperform the market" rating on Snowflake, with a target stock price of $170, and points out that the company's performance in the second quarter was solid, but there are still many unknown factors in the second half of the year.

Analysts, led by Kirk Materne, pointed out that the company achieved strong performance, with product revenue reaching $0.8293 billion (a 30% year-on-year increase), exceeding Evercore/Street's forecast of 26% to 27%. Analysts believe that although this data falls short of some institutions' expectations, it is a solid quarter that indicates the core business is still healthy and consumer patterns are returning to normal.

Analysts stated that due to Snowflake completing two nine-figure trades in the previous quarter, the company's RPO (Remaining Performance Obligation) has significantly increased to $5.2 billion (a 48% increase), and the company feels optimistic about the significant trades to be conducted in the second half of the year.

Analysts added that even though Snowflake's upward guidance for the second half of the 2025 fiscal year suggests that the impact of the "Iceberg" is beginning to show and the revenue growth of new AI products does not have enough upward potential in the short term to offset the impact of the "Iceberg" (as well as tiered storage).

In addition, Materne and his team stated that the current consumption trends (as of August) provide confidence to the company's management in improving the guidance for the third fiscal quarter. However, analysts expect the stock to continue to be in a tug-of-war between bulls and bears near current levels until subscription revenue hits bottom (ideally in the fourth or first fiscal quarter).

Analysts still believe that given the potential launch of new AI products in the 2026 fiscal year and a more normalized optimization environment, the risk/reward is tilted to the upside, but Snowflake may still be within the range of stock price penalties.

Meanwhile, Barclays Bank continues to maintain a "hold" rating on Snowflake and slightly lowers the target price from $146 to $142.

The bank's analysts state that they are unsure if the market's reaction to the company's second-quarter performance is fair. They note that the 30% year-on-year product growth rate is lower than Barclays' previous two quarter expectations of 33% to 34%. However, analysts add that although they have concerns about these performance figures, Barclays believes that a 30% growth level and the upward performance guidance are very respectable, especially considering the current significant decline in valuation.