Warren Buffett is the CEO of Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B). Over his 59-year tenure, Berkshire inventory has delivered a compound annual return of 19.8%, nearly twice the common annual return in the S&P 500 over the similar interval.
Subsequently, it is no shock that Wall Road watches Buffett’s each transfer. He’s on a promoting spree this yr, trimming a number of long-standing holdings in Berkshire’s portfolio. Snowflake(NYSE: SNOW) is one inventory the conglomerate offered fully throughout this yr’s second quarter.
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The cloud computing firm faces quite a few challenges, and its inventory barely delivered any positive factors throughout its four-year stint in Berkshire’s portfolio. Nevertheless, because of the firm’s rising presence in the synthetic intelligence (AI) trade, Snowflake inventory has jumped 26% since Buffett and his crew offered out a number of months in the past.
So, did they pull the set off too quickly? Let’s examine.
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Snowflake’s Information Cloud is a revolutionary platform that permits organizations to mixture their priceless info, the place it may be analyzed to extract deeper, extra actionable insights. It’s a crucial software as a result of giant organizations typically unfold digital workloads throughout a number of suppliers of cloud services, which results in knowledge fragmentation.
Snowflake’s give attention to fixing big-data challenges makes it a super candidate to construct AI services and products. The corporate launched a brand new platform in October 2023 known as Cortex AI, which permits companies to entry giant language fashions (LLMs) from main suppliers like Anthropic and Meta Platforms, which they’ll mix with their very own knowledge to create highly effective AI software program purposes.
Cortex additionally comes with highly effective built-in AI instruments. Doc AI permits companies to simply extract knowledge from unstructured sources like contracts or invoices, and Snowflake Copilot is a digital assistant that may flip easy text-based prompts into laptop code, to speed up duties like software program growth.
Earlier this month, the firm additionally unveiled a brand new software known as Snowflake Intelligence. It permits organizations to simply create knowledge brokers, which staff can work together with utilizing pure language. It means even nontechnical workers members can draw priceless insights from their firm’s knowledge, which creates alternatives to economize and generate extra income at each stage of the group.
As of the fiscal 2025 third quarter (ended Oct. 31), Snowflake stated over 3,200 of its 10,618 prospects had been utilizing the firm’s AI merchandise. Uptake has been spectacular, contemplating Cortex AI was launched barely one yr in the past.
Snowflake was rising at a lightning-fast tempo when Berkshire invested in the firm forward of its preliminary public providing (IPO) in 2020. It might frequently generate triple-digit share will increase in its quarterly income.
Nevertheless, Snowflake has struggled with decelerating income progress extra just lately. Elevated competitors is one issue behind the slowdown, but it surely additionally turns into tougher to develop rapidly as firms get larger.
Throughout Q3, Snowflake generated a report $900 million in product income, a 29% enhance from the year-ago interval. Whereas that was a stable progress price at face worth, the downward development is tough to disregard:
Snowflake’s quarterly product income and progress price.
To make issues worse, Snowflake really ramped up its spending throughout Q3, with nearly $1 billion going towards working bills (an all-time excessive). Analysis and growth spending grew by 33% in comparison with the year-ago interval, and advertising and marketing prices jumped 23%.
Sometimes, elevated spending ought to translate into quicker — not slower — income progress. Sadly, this disparity resulted in a 51% enhance in Snowflake’s internet loss, which got here in at $324.2 million for the quarter. It was the largest quarterly loss the firm has generated in fiscal 2025 up to now.
On a extra constructive be aware, Snowflake did see a whopping 55% enhance in its remaining efficiency obligations (RPOs), which got here in at a report $5.7 billion. RPOs are form of like an order backlog. However earlier than traders get too excited, the firm solely expects to acknowledge 50% of them as income in the subsequent 12 months.
There isn’t any readability on when the relaxation would possibly convert into income, and despite the fact that there are contracts in place, there isn’t a assure they’ll convert inside a timeframe that can really drive sturdy income progress. With that stated, it is excellent news that prospects are making long-term commitments to spend cash on Snowflake’s platforms.
As talked about, Berkshire invested in Snowflake forward of its IPO in 2020. The inventory got here public at a worth of $120, and when Berkshire offered its stake throughout Q2 2024, it was buying and selling at round $135. That represents a complete return of simply 12% over the four-year interval — contemplating Berkshire inventory averages a return of 19.8% yearly, Snowflake was a drag on its portfolio, to say the least.
Snowflake inventory has jumped 26% since Berkshire offered out. However I do not assume Buffett and his crew made a mistake by promoting as a result of the inventory may be very costly, and decelerating income progress makes its present valuation very arduous to justify. Snowflake’s price-to-sales (P/S) ratio is at present 16.6. Whereas it is steadily trending decrease, it is nonetheless far costlier than the three largest suppliers of cloud providers, Amazon, Microsoft, and Alphabet:
These three cloud giants even have quite a few different profitable companies, spanning e-commerce, enterprise software program, digital promoting, streaming, and extra, which Snowflake would not have. To not point out that they’re the three main builders of AI services and products.
Moreover, Microsoft Azure and Google Cloud grew their income at a quicker tempo than Snowflake in latest quarters — regardless of the reality they each generate considerably extra income than Snowflake.
Subsequently, I do not assume Snowflake inventory is an effective match for a worth investor like Buffett, so Berkshire’s sale wasn’t a shock. Though the firm has a vibrant future in the AI area, any investor seeking to purchase the inventory now ought to most likely look forward to a pullback, given its present P/S ratio.
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John Mackey, former CEO of Entire Meals Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of administrators. Suzanne Frey, an government at Alphabet, is a member of The Motley Idiot’s board of administrators. Randi Zuckerberg, a former director of market growth and spokeswoman for Fb and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of administrators. Anthony Di Pizio has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Alphabet, Amazon, Berkshire Hathaway, Meta Platforms, Microsoft, and Snowflake. The Motley Idiot recommends the following choices: lengthy January 2026 $395 calls on Microsoft and brief January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.
