We recently compiled a list of the Worst Cloud Stocks To Buy According to Short Sellers. In this article, we will look at where Snowflake Inc. (NYSE:SNOW) stands against the worst cloud stocks to buy according to short sellers.

Cloud computing refers to the use of remote servers, typically accessed via the Internet, to store, manage, and process data. A segment of the broader IT services industry, the cloud computing market was valued at $480 billion in 2022, and despite its size, it is projected to grow at a compound annual growth rate (CAGR) of 17%, reaching an estimated $2.2 trillion by 2032 (according to estimates from Precedence Research). Knowing this, it’s no surprise that many of the hottest tech stocks from 2019 to 2021 were tied to cloud computing, with ETFs like the First Trust Cloud Computing ETF surging 71.84% over the past five years.

The largest cloud computing segment is Software as a Service (SaaS), which generates the most revenue in the cloud market and has become the standard for delivering enterprise applications. Common uses of SaaS include customer relationship management, analytics, and artificial intelligence software. The next layer, Platform as a Service (PaaS), provides customers with a platform for application development. Lastly, Infrastructure as a Service (IaaS) offers customers off-site resources such as storage, servers, virtual machines, and networking.

Amid the disruption and excitement surrounding generative AI (GenAI), cloud service providers (CSPs) enable businesses to engage with customers and operate innovatively. With AI Ops and AI tools offered by CSPs, businesses can transform proof-of-concept ideas into production-ready solutions, delivering personalized recommendations, optimizing supply chains, and enhancing customer experiences. Following the launch of OpenAI’s ChatGPT, cloud providers have started utilizing these advancements to unlock new opportunities. Moreover, Tim Potter, a principal at Deloitte Consulting, made the following remarks regarding the relationship between AI and the cloud:

“AI is accelerating the adoption of cloud computing while enabling cloud providers to enhance platform solutions and services. Most AI solutions are either services offered directly by hyperscalers or solutions built on top of a hyperscaler’s cloud infrastructure.”

Another major driver of the cloud industry’s growth is the increasing recognition by large enterprises of its impact on their operations. According to a report by the Cloud Security Alliance, 94% of companies worldwide have already adopted cloud computing solutions this past year. This widespread adoption is projected to have a significant economic impact, with estimates suggesting it could generate around $3 trillion in revenue by 2030.

Although the Magnificent Seven stocks have been in the spotlight since the surge in artificial intelligence excitement, Apple Inc. has recently been making notable advancements in the AI space. Earlier this year, the iPhone-maker unveiled its new artificial intelligence initiative which is set to elevate the cloud to new levels of consumer exposure, with the tech giant moving toward offering on-device AI through a partnership with OpenAI’s ChatGPT platform.

Our Methodology

To compile our list of the 10 worst cloud stocks to buy according to short sellers, we first compiled a list of 20 cloud stocks by sifting through ETFs and online rankings. Then we checked their short interest and selected the 10 with the highest short interest. Finally, we ranked the stocks in ascending order of their short interest. We have also included the hedge fund sentiment for each stock, as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Snowflake Inc. (NYSE:SNOW)

Short % of float: 4.07%

Number of Hedge Fund Holders: 69

Snowflake Inc. (NYSE:SNOW) posted impressive results for Q2 of fiscal year 2025, with a 30% year-over-year increase in product revenue, reaching $829 million. This strong performance led the company to raise its full-year product revenue guidance.

While Deutsche Bank lowered its price target from $220 to $180 on SNOW, it maintained its Buy rating on the software company. The bank highlighted stable consumption and solid bookings but noted ongoing investor concerns about how new features and AI investments will drive consumption revenue. Despite these concerns, Deutsche Bank remains positive about Snowflake’s long-term potential, emphasizing that the company operates in a large market with ample room for growth and multiple winners. Snowflake’s strengths, including its multi-cloud capabilities, ease of use, extensibility, and network effects, are seen as key drivers of future success.

Approximately 25% of Snowflake’s accounts are now using its AI features weekly, signaling early adoption of these new products. However, uncertainty remains about how these features will translate into consumption revenue.

As of Q2 2024, 69 hedge funds held positions in Snowflake Inc. (NYSE:SNOW), with a total stake of $3.49 billion. Altimeter Capital Management was the largest shareholder, with a $1.29 billion position.

Overall SNOW ranks 7th on our list of the worst cloud stocks to buy according to short sellers. While we recognize the potential of SNOW as an investment, we believe certain deeply undervalued AI stocks offer greater prospects for higher returns in a shorter period. If you’re seeking an AI stock with even more promise than SNOW and trading at less than 5 times its earnings,  check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published on Insider Monkey.