We came across a bearish thesis on Snowflake Inc. (SNOW) on Substack by Elliot. In this article, we will summarize the bears’ thesis on SNOW. Snowflake Inc. (SNOW)'s share was trading at $173.70 as of Nov 27^th. SNOW’s forward P/E was 188.68 according to Yahoo Finance.

A software engineer at work, surrounded by a wall of computer monitors connected to a 'Data Cloud' platform.

Snowflake (SNOW) delivered impressive Q3 results, sending shares up 30%. Product revenue grew 29% YoY, exceeding analyst expectations, driven by robust performance in its core data warehouse business and new products like Snowpark. The company’s DBNR remained stable at 127%, signaling improved customer retention after a few quarters of sequential declines. RPO, a key metric, surged 55% YoY to $5.73 billion, supported by an uptick in large deals, including three $50 million contracts in the quarter. Query volume also showed strength, with daily queries growing 75% YoY to 6.3 billion in October. Snowflake’s free cash flow (FCF) margin was 8%, with a forecasted 26% FCF margin for the full year. However, this might be optimistic given the seasonality of the business, with stronger Q1 and Q4 results due to higher order volumes. The company repurchased $1.9 billion in shares YTD, while stock-based compensation (SBC) accounted for almost 40% of revenue.

While Snowflake’s quarter was solid, with positive momentum around products like Cortex AI and Snowpark, the 30% surge in stock price seems exaggerated. The competitive landscape is intensifying, with major cloud providers and next-gen competitors like Databricks expanding their offerings to compete directly with Snowflake. Valuation is another concern, with Snowflake’s current multiple at around 40x projected FCF for 2026, and closer to 55x when factoring in SBC and dilution.

Even in an optimistic scenario where Snowflake's revenue reaches $9.1 billion by 2028, the company would still need to maintain a 35x multiple to achieve a 10% annualized return, which seems unlikely given the intensifying competition and its already high valuation. Recent stock gains make it overvalued making it a less appealing investment at current levels.

Snowflake Inc. (SNOW) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 71 hedge fund portfolios held SNOW at the end of the third quarter which was 69 in the previous quarter. While we acknowledge the risk and potential of SNOW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SNOW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.