Are Snowflake’s Earnings the Latest Sign of the Coming AI Winter?

Snowflake (NYSE:SNOW) released its third-quarter earnings yesterday, posting results that topped Wall Street estimates. Product revenue climbed 28% year-over-year to $1.21 billion, while adjusted earnings hit $0.35 per share, beating the consensus estimate of $0.31. Yet, the stock plunged 11% in midday trading today as investors fixated on the company’s fourth-quarter guidance. Projected product revenue of $1.20 billion to $1.205 billion — implying just 27% growth at the midpoint — is roughly in line with the $1.20 billion expected, but growing slower than the 29% rate in the October quarter. Executives pointed to heavier discounts to secure deals amid competitive pressures, which slowed net revenue retention to 125% from 127% in the year-ago quarter. This comes as Microsoft (NASDAQ:MSFT) faces reports of slashing sales quotas for AI products like Foundry, though the company denies it, calling the claims a mix-up of growth targets and quotas. But broader doubts still linger over AI’s return on investment and enterprise budgets, with surveys showing only 39% of firms attributing meaningful EBIT impact to AI.  With these cracks appearing, is an AI winter — marked by a pullback in hype around the technology and enterprise-level spending cuts — finally approaching?

Discounts Drag on Snowflake’s Momentum

Snowflake’s weak outlook stems from a tougher sales environment where customers demand steeper concessions. CEO Sridhar Ramaswamy noted that while overall demand holds firm, “macro headwinds” forced more aggressive pricing to close large contracts. This led to a 2-point drop in net retention rates, signaling that enterprises are negotiating harder on expansions. Product gross margins held at 76%, but the reliance on discounts raises questions about pricing power in a maturing cloud data market. Analysts like those at Bernstein flagged this as a “yellow flag,” warning that sustained concessions could erode profitability if growth doesn’t rebound. Still, Snowflake’s remaining performance obligations rose 37% to $7.88 billion, hinting at a backlog that might cushion future quarters. The core issue is that investors have priced in 30%+ growth, but reality shows deceleration as the easy wins from post-pandemic digitization fade.

Cracks in the AI Foundation

Snowflake’s stumble amplifies wider signals that the AI boom may be faltering. Enterprise spending on AI is exploding — Gartner forecasts $1.5 trillion globally in 2025 — but ROI is lagging, or worse, nonexistent. McKinsey reports just 6% of firms are “high performers” seeing 5%+ EBIT gains from AI, with most stuck in pilots due to integration hurdles and data silos. Cloud capex at giants like Microsoft and Amazon (NASDAQ:AMZN) has surged to $400 billion annually, outpacing revenue growth and echoing the excesses of the dot-com era. Microsoft’s reported quota cuts, even if denied, underscore uneven adoption of advanced tools like AI agents, where sales teams hit only 20% of targets. Short sellers are piling in, with bets against Nvidia (NASDAQ:NVDA) and Palantir Technologies (NYSE:PLTR) from “Big Short” icon Michael Burry. He disclosed massive puts on these AI leaders, decrying circular dealmaking, idle infrastructure risks, and aggressive accounting on GPU depreciation by hyperscalers.If enterprises pull back amid 36% expected AI budget hikes but generate tepid results, the juggernaut could stall, hitting data platforms hardest as AI trials fizzle under cost scrutiny.

Key Takeaway

Snowflake is especially vulnerable to an AI spending retreat. As a data cloud provider fueling AI workloads, 50% of its new bookings tie to AI use cases, according to recent filings. A pullback from budget reallocations over a lack of AI ROI, could slash expansions, where Snowflake’s growth is heavily dependent. Although the company’s AI run-rate hit $100 million early, and megadeals with AWS underscore just how sticky demand is, with its stock up 52% year-to-date, Snowflake trades at 140x forward earnings and 18x sales. A reset to 100x earnings seems plausible after missing on guidance, even if long-term AI tailwinds could eventually propel shares past $300.I wouldn’t view this as a buy-the-dip opportunity. Enterprise AI is rapidly maturing, and companies are beginning to assess their returns in light of the investments made. As bears make credible arguments for a reckoning, investors may prefer to settle in for an AI winter that could freeze out many previous high-flying names.