Cloud data warehousing major Snowflake (NYSE: SNOW) stock remains up by about 7% over the past five trading days. Like many other specialized software names, Snowflake has largely shrugged off the broader tech market sell-off following the unveiling of the Chinese AI model DeepSeek. In fact, we believe Snowflake could benefit from the highly cost-effective Chinese AI model, given the potential for wider AI deployment and the fact that the company doesn’t directly sell AI computing capacity.
DeepSeek’s Impact on Compute
DeepSeek has restructured the core methods used in AI model development by emphasizing software-driven resource optimization over hardware dependency. This approach could lower the computing capacity needed for AI tasks. In fact, DeepSeek claims it spent just about $5.5 million to train its V3 model, compared to the hundreds of millions that companies like OpenAI are reported to spend. This shift has impacted semiconductor players, as AI companies may adopt DeepSeek’s methods (which are open source) to integrate into their own models, potentially reducing demand for AI semiconductors and GPUs. As an aside, see Buy, Sell, Or Hold LMT Stock At $460?
As a cloud-based data platform, Snowflake provides storage and computing solutions that help businesses analyze and manage their data efficiently, offering an alternative to on-premise data warehouses. Snowflake does not own its own infrastructure and the company’s core business is not selling compute capacity but rather providing solutions, focused on data warehousing and analytics. The company buys computing and storage from cloud majors such as Amazon and Microsoft at scale and more efficient AI models could help it reduce costs and improve margins. This could insulate the company from any possible changes on the computing infrastructure side.
How Snowflake Could Benefit
However, this trend could be positive for the broader adoption of AI. Lowering the cost of large language models could significantly reduce the barrier to AI adoption for end customers. Snowflake is well-positioned to benefit from this trend. The company announced on Monday that it would add DeepSeek models to its AI model marketplace, responding to a considerable amount of customer inquiries. Snowflake has been investing in AI for some time now, with over 1,000 generative AI use cases deployed in production on its platform with over 3,200 customers using its platform for AI applications. For Snowflake, cheaper and more efficient AI tools could help its customers, who house much of their business data on the company’s platforms, to perform better analyses and generate more actionable insights. As the cost of running AI models potentially decreases, customers may become more interested in using generative AI tools for more use cases, thereby driving more demand for Snowflake’s data storage and processing services.
The decrease in SNOW stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 20% in 2021, -58% in 2022, 39% in 2023, and -22% in 2024. The Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could SNOW face a similar situation as it did in 2021, 2022, and 2024 and underperform the S&P over the next 12 months – or will it see a recovery?
We estimate Snowflake’s valuation at about $180 per share, which is roughly in line with the current market price. See the Trefis analysis for Snowflakes’ valuation.
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