Meet the AI ​​Stock Warren Buffett Just Completely Sold — I’m Not Surprised

Warren Buffett is the chairman and CEO of the Berkshire Hathaway (BRK.A 0.28%) (BRK.B 0.24%) investment company. Berkshire wholly owns several well-known companies, including GEICO Insurance and Dairy Queen, but it also owns 47 publicly traded stocks and securities.

During Buffett’s 59-year tenure, Berkshire has delivered a compound annual return of 19.8% to its investors. To put it another way, a $1,000 investment in Berkshire stock in 1965 would be worth a whopping $42.5 million today. The same investment in the S&P 500 would have grown to just $328,500.

The conglomerate’s portfolio includes a large number of high-quality stocks such as Apple, Coca ColaAnd American Expressbut in 2020 it acquired a small stake in a cloud computing company Snowflake (SNOW 1.85%)In my opinion, Snowflake was not a good fit for Berkshire’s portfolio, nor did it align with Buffett’s proven investment strategy.

However, according to Berkshire’s 13-F filing for the second quarter of 2024 (ending June 30), the conglomerate has already sold its Snowflake shares. Here’s why I’m not surprised.

Image source: The Motley Fool.

Snowflake focuses on artificial intelligence

Snowflake specializes in building data clouds that help organizations break down siloed data into a unified source of information that they can then extract maximum value from and use in their daily operations. Because data is the source that every artificial intelligence (AI) model draws from to generate the answers it needs, Snowflake is in a great position to build products in that space.

Last year, the company launched Cortex AI, a platform designed to enhance the capabilities of the data cloud and help organizations use their data to build AI applications. To accelerate their progress, Snowflake customers can access pre-built large language models (LLMs) such as Mistral Large and Meta platforms‘ Llama 3, on Cortex.

The platform also comes with a host of useful AI tools. Document AI enables businesses to quickly extract valuable data from unstructured sources like contracts and invoices, and Cortex Search understands natural language, allowing developers to quickly retrieve data with a simple prompt.

Cortex AI also comes with an artificial intelligence (AI) virtual assistant called Copilot. This assistant can understand the context behind an organization’s data, so it can make code suggestions and even translate natural language into code. This can save developers a lot of time.

At the end of Snowflake’s second quarter of fiscal 2025 (which ended July 31), the company said that about 2,500 of its 10,249 customers were using its AI products and services on a weekly basis. That’s a pretty good number, considering most of its products and services were launched in just the past year.

Snowflake’s revenue growth slows as losses mount

Snowflake generated $829.3 million in product revenue in Q2, up 30% from the same period last year. While the result beat management’s forecast, that growth rate was still a slowdown sequentially and year-over-year. Unfortunately, slowing revenue growth has been a consistent theme for Snowflake in recent years.

That’s a problem, because Snowflake is investing heavily in building new products to compete in the AI ​​race. The company reported record operating expenses of $936 million in Q2, up 26% from the same period last year. Research and development spending alone came in at $437.6 million, up nearly 40%.

That resulted in a net loss of $316.9 million, a 40% jump from the year-ago quarter. In other words, Snowflake is burning through a lot of cash on the bottom line, and it doesn’t even have steady — let alone accelerating — revenue growth to show for it.

Spending is unlikely to slow down anytime soon, as the company continued to hire more workers in Q2. Its headcount was at a record high of 7,630 at the end of the quarter, up 14% from a year ago.

On the positive side, Snowflake reported $5.2 billion in remaining performance obligations (RPOs) at the end of Q2, up 48%. RPOs typically reflect the backlog of customers signing long-term contracts. The company expects to convert half of its RPOs to revenue within 12 months, but it didn’t disclose how long it will take to convert them all. While it’s possible that this could lead to accelerated revenue growth in the future, it’s not a guarantee.

Why Snowflake Didn’t Fit Into Buffett’s Portfolio

Warren Buffett looks for several characteristics in a company when deciding whether to invest. These include stable growth, robust profitability, a strong management team, and shareholder-friendly programs such as dividend plans and stock buybacks. When he finds a company he likes, he also wants to pay a fair price for it.

Snowflake continues to grow and even has a share buyback program. However, the company’s mounting losses will likely prevent it from paying dividends or expanding its share buybacks in the future. Additionally, while Snowflake has enough cash and equivalents on hand ($3.2 billion) to support its short-term losses, those losses will ultimately hamper the company’s ability to invest in growth initiatives like marketing and research and development.

So achieving profitability will be critical at some point, but the potential cost savings required to achieve this could result in even lower revenue growth.

Then there’s Snowflake’s valuation. Since the company isn’t profitable, we can value it using its price-to-sales (P/S) ratio – market cap divided by annual revenue. Based on Snowflake’s market cap of $39.5 billion and its trailing 12-month product revenue of $3.1 billion, the stock is trading at a P/S ratio of 12.9.

That’s pretty expensive. Cloud industry leaders love Microsoft, AmazonAnd Alphabet are cheaper, despite Microsoft Azure and Google Cloud growing revenues at a similar pace to Snowflake. All three tech giants have diverse portfolios of other growing businesses, which Snowflake does not.

SNOW PS Ratio data by YCharts

Berkshire bought Snowflake shares around the time of its 2020 IPO, so it likely paid closer to $120 per share. It was a small position, representing less than 0.5% of the conglomerate’s $312 billion portfolio. We don’t know which Berkshire asset manager made the official decision to buy, but it was likely one of Buffett’s lieutenants.

The second-quarter low in Snowflake shares was $124.21, so given the conglomerate’s entry point, Berkshire likely didn’t lose money when it sold. However, the return was lackluster given the four-year holding period.