Snowflake Inc. shares surged approximately 10% on Thursday, reaching $153.21 in early New York trading, as a broader software sector rally—ignited by Datadog's upgraded full-year guidance—refocused attention on the data-cloud company just weeks before its next earnings report.
The rebound challenges the prevailing narrative around Snowflake this year: while growth remains steady, investors remain skeptical that artificial intelligence will translate into sustainable, higher-margin business. The stock has dropped 35% year-to-date amid concerns over margin pressure from AI spending and intensifying competition.
Snowflake operates on a usage-based billing model, where customers pay based on actual consumption rather than fixed subscriptions. This structure amplifies revenue when clients increase workloads but also exposes the company to immediate slowdowns if cloud spending pulls back.
Datadog, an observability software firm, kicked off the sector rally after reporting first-quarter revenue of $1.01 billion, a 32% year-over-year increase, and raising its full-year outlook to between $4.30 billion and $4.34 billion. Datadog shares jumped 29%, while MongoDB gained about 12%, signaling renewed investor appetite for cloud and AI-related software stocks.
Snowflake's recent financial performance remains solid. Last quarter, product revenue rose 30% to $1.23 billion, and remaining performance obligations reached $9.77 billion, up 42%. Net revenue retention stood at 125%, indicating existing customers are increasing spending despite churn and cutbacks. The company forecasts first-quarter fiscal 2027 product revenue between $1.262 billion and $1.267 billion, representing 27% growth, with full-year product revenue expected at $5.66 billion. While growth is brisk, it falls short of the hypergrowth pace that once justified a higher valuation multiple.
AI has become central to Snowflake's strategy. The company has launched Snowflake Intelligence and Cortex Code, tools designed to enable businesses to deploy AI agents that operate across data and business platforms. According to Snowflake, over 9,100 accounts use its AI features weekly, and Snowflake Intelligence has been adopted by approximately 2,500 accounts in just three months. In February, CEO Sridhar Ramaswamy stated that "the promise of AI became real" during the quarter, and last month, VP of AI Baris Gultekin emphasized the goal of helping customers use AI with "the right data and guardrails."
Institutional interest appears to be building. Swedbank disclosed in its latest 13F filing that it owned about 1.65 million Snowflake shares at the end of March, up from roughly 1.33 million three months earlier, though the position's value declined as shares fell during the quarter. Analysts remain largely bullish, with TipRanks showing 30 buy ratings, three holds, and no sells, alongside an average price target of $225.17. However, Bank of America's Koji Ikeda lowered his target to $195 from $275, citing reduced infrastructure software forecasts while maintaining a buy rating.
The risks are significant. While AI demand may continue to climb, higher costs to support that demand could pressure margins, and competition for cloud budgets is fierce from Datadog, MongoDB, and numerous private data firms. If Snowflake's May report reveals sluggish consumption, declining retention, or a larger-than-expected AI cost burden, Thursday's rally could prove to be a short-covering bounce rather than a genuine trend reversal.
Snowflake is scheduled to release its fiscal first-quarter results after U.S. markets close on May 27, with an investor call at 2 p.m. Pacific. This time, investors are not looking for new AI buzzwords—they want evidence that AI workloads are driving revenue, renewing contracts, and demonstrating margin discipline.
