AI growth accelerates, but lower margins weigh on shares
- Product revenue grew 37% year over year in Q2 FY27, driven by strong AI adoption.
- Net Revenue Retention held stable at 126%, proving existing customers continue to expand their spending.
- Product gross margin dropped to 71% in the latest quarter due to the costs of newly launched AI capabilities.
- The stock faces a difficult valuation setup based on Finn's bottom-tier valuation score.
- Cyberattacks on customer accounts remain an ongoing threat that creates persistent reputation risk.
AI adoption drives top line but hurts margins
Snowflake is proving its AI story is real. In Q2 FY27, product revenue growth accelerated to 37% year over year. Customers are adopting new tools like Cortex Code and CoWork quickly, which drives more data consumption. The base business also remains healthy, with Net Revenue Retention stable at 126%.
The bull case relies on this AI flywheel effect. Companies need clean data to power their AI agents. Because Snowflake already holds that data, it is in a prime position to capture new enterprise AI spending directly. The recent acquisition of Natoma expands this by giving customers a platform for AI agents.
The bear case has shifted from slowing growth to margin compression. AI products cost more to operate than the core data platform. Management acknowledged this by lowering the FY27 product gross margin guidance to 74%, and the latest 10-Q showed product gross margin actually compressed to 71% in the recent quarter. Valuation also remains a major headwind.
Legal and reputation risks remain high. The company continues to face fallout from ongoing cyberattacks targeting customer accounts that lack multi-factor authentication. Even if the platform itself is secure, the brand impact could slow future deals.
Consumption model faces cost pressures
Snowflake charges customers based on how much capacity they consume. When a company runs queries, moves data, or asks an AI agent a question, it burns through prepaid credits. This allows revenue to grow naturally as customers use the platform more.
Product revenue is the main driver. This model is great for growth but carries margin risks. Snowflake pays cloud providers like Amazon and Microsoft for the underlying computing power and storage.
The rise of AI workloads is changing the cost structure. AI products require expensive computing resources, which carry lower gross margins than traditional data warehousing. This mix shift pushed the product gross margin down to 71% recently as new AI features ramp up before reaching scale.
Data core, AI edge
Core Data Platform
This is the base platform for data warehousing, data lakes, data engineering, and analytics. It remains the main engine behind product revenue.
Cortex AI and Snowflake Intelligence
These tools help customers build AI features on top of their own data. They are driving the recent acceleration in overall revenue.
Cortex Code and CoWork
These specific AI applications are seeing rapid adoption. Cortex Code has expanded to 5,800 accounts, and CoWork has surpassed 9,100 accounts.
Snowpark and Dynamic Tables
These tools help developers and data teams build pipelines and apps inside Snowflake.
Iceberg Tables
Iceberg support helps Snowflake work with the open Apache Iceberg table format for customers that want open data standards.
Natoma Integration
The Natoma integration is now live via the Cortex AI gateway. It gives users an agented control plane to send emails or open Jira tickets directly from Snowflake.
One segment, two revenue lines
Snowflake reports one operating segment. For the three months ended July 31, 2026, the revenue mix below uses the filing's product revenue and professional services and other revenue lines.
What could break the story
Lower-margin AI mix pressures profits
High impact · High oddsSnowflake says new AI products carry lower gross margins than the core platform. As AI becomes a larger share of revenue, overall profitability is taking a hit. The product gross margin recently dropped to 71% due to these newly launched capabilities.
Customer account attacks keep spreading
High impact · Medium oddsSnowflake has been managing the fallout of cyberattacks on customer accounts since May 2024. The attacks target customers that fail to use controls like MFA. Buyers may slow deals if the brand remains linked with data theft.
AI usage fades after early excitement
High impact · Medium oddsThe bull case needs AI products to create durable consumption over time. Cortex Code adoption is strong right now, but the key question is whether customers keep spending after their early tests are done.
Premium valuation leaves little room for mistakes
High impact · High oddsFinn's valuation score is very low, meaning the stock already prices in rapid growth. A small miss in growth, margin, or security news could trigger a steep drop.
Sources and research notes
This page combines Finn's company research with public filings and other cited materials. The thesis is reviewed when material company information changes; Finn Scores use the latest available scoring data.
- Thesis reviewed
- September 13, 2026
- Score data
- September 27, 2026
- Reviewed by
- Shivam Bharuka
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