Snowflake (SNOW) lowered its fiscal 2027 forecast for adjusted product gross margin to 74%, down from 75% in its previous outlook. The company attributed the reduction to a rising share of sales from artificial intelligence workloads, which executives stated currently carry a lower contribution margin than the rest of the product lineup.
During the fiscal Q2 2027 earnings call on September 2, 2026, management explained that AI products drove about half of the acceleration in product revenue growth, which reached 37% year over year. Adoption is increasing, with the AI product CoWork expanding to 5,800 total accounts during the quarter. Because AI workloads are sold directly within the product segment, which accounts for 95% of total revenue, the thinner margins affect the core business rather than a separate division.
Product revenue for fiscal 2026 totaled $4.5 billion, a 29.2% increase from the prior year. Snowflake’s current valuation stands at 23.2 times sales, compared with 3.1 for the S&P 500. The stock trades just 2.3% below its one-year high, despite a net margin of negative 20.1% over the past twelve months, against a profit margin of 13.3% for the broader index. This valuation gap suggests the share price assumes rapid growth will eventually translate into profitability.
Management noted that Snowflake remains on track for a GAAP profit in the fourth quarter of fiscal 2028. To support this trajectory, the company raised its fiscal 2027 forecast for adjusted operating margin to 14.5%, up from 13.5%. Executives stated that slowing headcount expense is offsetting growing cloud costs. This strategy protects overall operating margins but does not indicate that AI sales themselves are becoming more profitable.
Two factors may influence the AI margin over time. Executives noted that makers of leading AI models have been revising their prices downward regularly. Additionally, customers using AI on Snowflake tend to consume more services across the rest of the platform, though management said it was not yet ready to share exact figures on this cross-sell effect.
Snowflake stock has returned 169% over the past six months, significantly outperforming the S&P 500’s 14.0% gain. However, the stock previously dropped 66% during the 2022 inflation shock, compared with a 24% decline for the index. The adjusted product gross margin in the upcoming fiscal Q3 2027 report will be a key indicator of how quickly these AI-related margin pressures are being managed.