Snowflake reported Q2 last week and the numbers were a blowout, product revenue grew 37% yoy to $1.49B, the third straight quarter of accelerating growth after they exited last fiscal year at 30%. They beat top and bottom line, raised full year product revenue guidance to $6.07B, and lifted operating margin guidance to 14.5%. Net revenue retention is still 126%, the AI products are real and now drive roughly half the acceleration. The sell side agreed, with Goldman moving to $436, Argus to $450, and consensus sitting firmly at Strong Buy.
Here is what I cannot get past, with all of that, the stock ran to a new high near $384 the day after the print and then gave almost all of it back within two sessions, closing around $337. A real beat and raise, a wall of target hikes, and the marginal buyer still walked away.
My read is that this is a valuation problem, not a business problem, around $337 the company is roughly $123B, about 20x forward product revenue, and still GAAP unprofitable with a $191M net loss in the quarter and no GAAP profitability guided until Q4 FY28. Free cash flow actually missed, at $83.8M against $104M expected, and the piece that gets underweighted is the guide for product gross margin down to 74%, explicitly because AI workloads are more compute intensive. So the flywheel driving the reacceleration is also structurally lower margin. You are paying a higher multiple for revenue that converts to profit less efficiently than the core warehouse business did.
At 20x sales the stock is priced for years of flawless execution, that is fine while everything compounds. It gets fragile the moment growth merely stays great instead of getting greater, because there is no multiple expansion left to do the work. The failed breakout looks to me like the first sign the marginal buyer is tapped out even on good news.
The next print on December 2 is the hinge, if they post a fourth straight quarter of acceleration, I am wrong, the multiple holds or expands, and the fade was just profit taking. If growth flattens or the margin mix keeps compressing, a 20x multiple has a long way to fall and it happens fast. I am positioned bearish for the short term on that basis, great business, I just think it is the wrong price today. Bear spread 380/300 exp jan17.
When a stock this expensive delivers a blowout and still cannot hold the gains, do you read that as a healthy pause before the next leg, or markets telling you the multiple is exhausted?