Snowflake's Core Demand Remains Strong, but Valuation and Market Expectations Set a High Bar for 2Q27 Results

Overview

This report evaluates Snowflake's demand, AI product progress, revenue guidance, and valuation ahead of its 2Q27 results. Morgan Stanley believes the core data business remains resilient and expects quarterly revenue to exceed guidance alongside an increase in full-year guidance, but the sharp rise in the share price and high valuation imply that market expectations are already elevated.

Core views

The infrastructure software demand environment is the starting point for the report's view that Snowflake's fundamentals remain solid. Morgan Stanley states that the current environment is the strongest for infrastructure demand since 2022: publicly disclosed growth is being driven not only by AI workloads, but also by expanding core infrastructure services, while a surge in software development activity is fueling a new wave of digital innovation and application creation. Among the companies in Morgan Stanley's coverage with a “normal-cycle” quarter ending in June, 7 out of 8 recorded accelerating growth in core key metrics, while Akamai, the only company that did not accelerate, still maintained growth. Industry interviews regarding companies with “off-cycle” quarters ending in July indicated that, with few exceptions, partners generally observed stable or accelerating 2Q year-over-year growth trends versus 1Q. However, the market has already recognized the improvement in demand, and the relevant stocks have risen significantly over the past three months, narrowing the disconnect between positive fundamentals and share-price performance. Partner checks on Snowflake generally support strength in the core business, although the incremental contribution from AI remains uneven. Several partners said business progress was ahead of internal plans, with one raising its outlook for the second half; another stated that core demand was in line with expectations, but overall growth fell short of its original target because AI-related revenue was below expectations. The core data warehouse remains the primary source of growth, with next-generation data warehousing, storage, and compute demand running ahead, while adjacent products such as Snowpark, Dynamic Tables, Unistore, and Iceberg also provide incremental contributions. Cortex Code shows the clearest adoption signals among AI products, appearing in approximately one-third of one partner's active deal discussions and beginning to expand from technical users to knowledge workers and finance functions. However, the broader AI product portfolio still accounts for only approximately 5%—8% of that partner's current business. Competitive evidence regarding AI products is not uniformly positive. One partner said Cortex Code recently prevailed in direct comparisons due to its native context, governance, and data-lineage capabilities, while another expected general-purpose coding agents such as Claude Code to prevail in many coding proofs of concept. Databricks was the competitor most frequently cited by partners. The two platforms often coexist within large enterprises, but their workload positioning differs: Snowflake is stronger in general-purpose and business-unit-led environments, while Databricks is better suited to complex engineering and machine-learning use cases. As product overlap increases, one partner views Databricks as the more aggressive share gainer, making Snowflake's ability to convert early AI trials into broader actual consumption a key variable. For the quarterly forecast, Morgan Stanley expects 2Q27 product revenue to grow approximately 34% year over year, broadly in line with the 1Q27 growth rate and about 3% above the midpoint of company guidance of approximately 30%. This forecast faces an approximately 530-basis-point sequential increase in year-over-year comparison difficulty because Snowflake benefited from an unusually concentrated level of migration activity in 2Q26. The report expects the company to guide to approximately 32% product revenue growth in 3Q27, about 1.5% above market consensus. It also expects the FY27 product revenue growth outlook to be raised from the current midpoint of 30.6% to 32%—33%, implying 4Q27 growth approximately 90 basis points above the current market consensus of 29.5%. Fundamental resilience does not eliminate near-term valuation risk. Snowflake's share price has risen more than approximately 80% since the release of its 1Q27 results and currently trades at approximately 67 times EV/CY27 free cash flow, or approximately 2.46 times on a growth-adjusted basis. The corresponding levels for large-cap software companies are approximately 33 times and 1.73 times. Morgan Stanley therefore believes that the bar for 2Q27 results is high and that the current risk-reward is not particularly compelling. Nevertheless, the healthy demand environment, stability of the core business, and still-early but expanding contributions from AI products such as Cortex Code support its belief that Snowflake's growth is sustainable and that the company may continue to demonstrate its status as an AI beneficiary. Morgan Stanley therefore reiterates its Overweight rating. The long-term investment thesis is based on improved execution, share gains in core data analytics, and expansion of the data and AI markets. The report states that under CEO Sridhar Ramaswamy, Snowflake has achieved more focused execution across sales, go-to-market, and product engineering, with product revenue growth stabilizing in the high-20% range. The company has developed a clearer strategy for addressing a market opportunity exceeding $300 billion, supporting long-term growth above 20% and continued operating-margin expansion. The base case assumes a CY25—CY30 revenue CAGR of approximately 25%, CY30 revenue of approximately $14.2 billion, operating margin rising from 6% in CY24 to approximately 20%, free-cash-flow margin reaching approximately 29.3%, and free cash flow of approximately $4.2 billion. Applying an EV/FCF multiple of approximately 39 times to that free cash flow, equivalent to approximately 1.35 times EV/FCF/growth, and discounting it back to CY27 at a rate of 11.1% yields a target price of $300. The scenario analysis illustrates the valuation's sensitivity to changes in growth, margins, and competition. The bull-case target price is $450, assuming that the Data Cloud vision expands the core market and successfully penetrates adjacent areas, with a CY25—CY30 revenue CAGR of approximately 28%, CY30 revenue of approximately $16.2 billion, operating margin of approximately 23.5%, free-cash-flow margin of approximately 33%, free cash flow of approximately $5.3 billion, and an applied multiple of approximately 46 times. This multiple corresponds to a CY28—CY30 free-cash-flow CAGR of approximately 33% and approximately 1.38 times EV/FCF/growth. The bear-case target price is $121, assuming that public-cloud competition weighs on growth, reducing the revenue CAGR to approximately 21%, with CY30 revenue of approximately $12.2 billion, operating margin of approximately 18%, free-cash-flow margin of approximately 27%, free cash flow of approximately $3.3 billion, and an applied multiple of approximately 19 times, corresponding to a free-cash-flow CAGR of approximately 24% and approximately 0.8 times EV/FCF/growth.

Analysis framework

Morgan Stanley first assesses overall demand using infrastructure software industry data and partner checks, then separates the contributions from Snowflake's core data warehouse, adjacent products, and AI products. It also evaluates the potential magnitude of a 2Q27 revenue beat and the scope for increases to 3Q and FY27 guidance in light of the year-over-year comparison base. The report then compares its forecasts with market consensus, the current valuation, and valuations of large-cap software companies before estimating the target price and risk-reward under bull, base, and bear long-term operating scenarios.

Methodology notes

• Company Fundamentals and Financial Framework

  Partner Channel Checks

  The report uses Snowflake partners' business progress, second-half outlooks, product adoption, and competitive feedback to determine whether core demand is running ahead of plans and to distinguish the actual growth contributions of the core data business and AI products.

• Event-Driven Trading and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of Results, Guidance, and Market Consensus

  The report compares its 2Q27 product revenue forecast with company guidance and compares the implied 3Q27 and 4Q27 growth rates with market consensus to gauge the potential magnitude of an earnings beat and guidance increase.

• Valuation Methodology

  EV/FCF and Growth-Adjusted Valuation

  The report multiplies future free cash flow by an EV/FCF multiple and uses the EV/FCF/growth ratio to assess whether the multiple is commensurate with growth. The base case also discounts the CY30 valuation back to CY27 at a rate of 11.1%.

• Valuation Methodology

  Bull, Base, and Bear Scenario Valuation

  The report varies revenue growth, operating margin, free-cash-flow margin, and valuation multiples to derive scenario prices of $450, $300, and $121, illustrating how competitive and execution outcomes affect valuation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Snowflake Inc. (SNOW.N, SNOW UN)

  Core data warehouse demand, adjacent-product expansion, and early AI adoption support revenue growth, but the high valuation, competition from Databricks, and uneven AI monetization raise the performance bar.

  Strengths

  The core data warehouse remains the primary source of growth, with next-generation data warehousing, storage, and compute remaining strong; execution across sales, go-to-market, and product engineering has improved; and Cortex Code adoption is beginning to expand.

  Weaknesses

  The broader AI product contribution remains small and partner feedback is mixed, while Databricks has an advantage in complex engineering and machine-learning workloads.

  Comparison

  Snowflake is relatively stronger in general-purpose and business-unit-led environments, while Databricks is stronger in complex engineering and machine-learning use cases. Snowflake's valuation of approximately 67 times CY27 free cash flow exceeds approximately 33 times for large-cap software companies.

  Risks

  Competition could depress pricing and weigh on growth and margins, while expansion into adjacent data-management use cases such as OLTP could also prove difficult.

Key data

• 2Q27 Product Revenue Growth ForecastApproximately 34% year over yearAbout 3% above the midpoint of company guidance of approximately 30%, but with the year-over-year comparison becoming approximately 530 basis points more difficult sequentially
• 3Q27 Product Revenue Guidance ForecastApproximately 32% year over yearApproximately 1.5% above market consensus
• FY27 Product Revenue Growth Guidance Forecast32%—33% year over yearThe current guidance midpoint is 30.6%
• Implied 4Q27 Upside to ConsensusApproximately 90 basis pointsCurrent 4Q27 market consensus is 29.5% year-over-year growth
• Current Business Contribution from AI ProductsApproximately 5%—8%The share of current business contributed by the broader AI product portfolio, according to one partner
• Cortex Code Penetration in Deal DiscussionsApproximately one-thirdAppearing in one partner's active deal discussions
• Share-Price IncreaseMore than approximately 80%Increase since the release of 1Q27 results
• Current ValuationApproximately 67 times EV/CY27 FCF; approximately 2.46 times growth-adjustedComparable levels for large-cap software companies are approximately 33 times and 1.73 times
• Base Case$300.00CY30 revenue of approximately $14.2 billion, operating margin of approximately 20%, and free cash flow of approximately $4.2 billion
• Bull Case$450.00CY30 revenue of approximately $16.2 billion, operating margin of approximately 23.5%, and free cash flow of approximately $5.3 billion
• Bear Case$121.00CY30 revenue of approximately $12.2 billion, operating margin of approximately 18%, and free cash flow of approximately $3.3 billion
• Market OpportunityMore than $300 billionSnowflake's long-term data and AI market opportunity as stated in the report

Impact & implications

The report believes that core data warehouse demand and the infrastructure software environment are sufficient to support 2Q27 revenue exceeding guidance and an increase to the FY27 outlook, while AI products provide an early but not yet fully realized incremental contribution. Because these improvements are already partially reflected in a share-price increase of more than approximately 80% and a valuation of approximately 67 times CY27 free cash flow, actual results, subsequent guidance, and AI adoption must be sufficiently strong to meet current expectations. Morgan Stanley therefore maintains its Overweight rating but believes that post-earnings share-price weakness would create a more attractive risk-reward.

Risks

• Competitors may increase pricing pressure, weighing on Snowflake's revenue growth and margins.
• Snowflake's expansion into adjacent data-management use cases such as OLTP may prove more difficult than expected.
• As product overlap increases, Databricks may pursue share gains more aggressively, particularly in complex engineering and machine-learning workloads.
• AI-related revenue and adoption progress may fall short of expectations and fail to supplement core-business growth in a timely manner.
• The share price has risen more than approximately 80% since the 1Q27 results and the valuation is high, creating a demanding market-expectations bar for 2Q27 results and guidance.

What to watch

• Whether 2Q27 product revenue can achieve approximately 34% year-over-year growth despite an approximately 530-basis-point increase in comparison difficulty.
• Whether 3Q27 product revenue guidance can reach approximately 32% and FY27 guidance can be raised to 32%—33%.
• Changes in the net revenue retention rate.
• Growth in the number of customers with trailing-12-month product revenue exceeding $1 million.
• Snowflake's progress in gaining market share from traditional on-premises data warehouse vendors.
• Operating-margin and free-cash-flow performance.
• Whether Cortex Code and other AI products can convert trials and deal discussions into broader actual revenue contributions.
• Competition between Snowflake and Databricks in overlapping workloads and their coexistence within large enterprises.