At first the dream sequence seems totally random, but after thinking about it for a while I believe there is some sort of logic to it. Namely: the dream gradually gets worse.
At first he dreams of Fishlegs and Astrid mocking him and Heather saying she was in love with him. Snotlout is not stupid and despite his confident flirting he clearly knows Astrid and Heather are not into him. Heather actually saying it is just a confirmation of what he already knew, but maybe he has a tiny bit of hope that she (or Astrid) might fall for him in the future. As a beggar, however, that is absolutely out of the question.
Then he dreams of Ruff and Tuff with…. a golden sheep. Okay, I have no idea why they have a sheep, but Snotlout detests being less than those idiot twins even more so than Fishlegs, Astrid and Heaher’s rejection. The twins also stand on a cart pulled by their dragon: they are literally and figuratively looking down on Snotlout.
Third up are Hiccup and Toothless. Snotlout probably respects them a LOT and would love to get his respect as well. He became a fan from the moment scrawny little Hiccup became the cool guy in town and I do not think that ever stopped after the events of HTTYD 1. I even like to believe he secretly wishes to be more like Hiccup. After all, Hiccup has the night fury, the respect if his dad/the chief, almost all dragons like him, even Astrid likes him. He said something like this in Defiant one. “Hiccup’s so smart! Hiccup’s so brave! He killed the Red Death! He trained the dragons! He’s got the metal leg!“
Forelast is Gustav replacing him. Gustav is his fan and probably his only fan. And as with the twins, Gustav being considered better than him is a true nightmare.
But what wakes him up and what thus is his worst nightmare is losing Hookfang.
And I don’t know whether to find that endearing or sad.