Snowflake stocks sink during a roaring bull market, so top investors might prefer other opportunities instead.
Technical stock Nvidia saw its price rise 151% so far in 2024. Meanwhile, tech stocks Snowflake (SNOW -4.39%) has fallen by 40% in the same period. It turns out that having strong ties to the artificial intelligence (AI) sector in itself is not enough to create value. Investors also expect solid financial results.
Snowflake is a provider of cloud computing software solutions and generated meteoric revenue growth when its shares first went public in 2020. That growth has since slowed, while at the same time the company continues to spend heavily on developing new AI products and services. time. These higher expenses cause large losses on the bottom line. It’s also making institutional investors reconsider their investment theories about Snowflake.
Top investment funds are heading for the exit
Warren Buffetts Berkshire Hathaway Holding bought Snowflake’s stock ahead of its 2020 IPO. Although the price it paid was not made public, Berkshire likely paid around $120 per share. The stock rose to an all-time high of $392 at the end of 2021, but held steady on the way back. Berkshire eventually sold its entire stake in Snowflake in the second quarter of 2024, when it was trading at about $135 per share.
Prolific tech investor Brad Gerstner led Snowflake’s Series C investment round in 2015 (when it was still a private company) through his fund Altimeter Capital, so he believed in its potential very early on. The fund owned 15.4 million Snowflake shares in the third quarter of 2023, but has since cut that position by 38%. It sold nearly 3 million shares in the final quarter of 2023, followed by another 2.1 million shares in the first quarter of 2024, and another 730,343 shares in the recent second quarter.
Why have Buffett and Gerstner seemingly turned bearish?
Snowflake is preparing for the AI revolution
Large, complex organizations that use multiple cloud providers often find that their data is highly fragmented as it is spread across different platforms. Snowflake’s Data Cloud is a revolutionary tool that can bring these together in a cross-platform way, making it easier for the organization to analyze it and gain valuable insights that can be used to improve day-to-day operations.
Last year, Snowflake took the plunge into AI products and services when it launched Cortex AI, which is designed to complement the Data Cloud. The Cortex platform allows companies to combine their data with off-the-shelf large language models (LLMs). Metaplatforms‘ Llama 3 and Mistral Large, so they can build AI software applications.
Cortex also comes with several pre-built AI tools. Cortex Search uses natural language processing so developers can instantly retrieve data from large sets with a simple prompt. Then there’s Document AI, which can quickly extract valuable information from unstructured sources such as contracts and invoices. In the past, that kind of data could only be processed if a human employee manually read each document and transcribed the information into a usable format.
At the end of Snowflake’s second quarter in fiscal 2025 (ending July 31), approximately 2,500 of its 10,249 customers were using its AI products weekly. That indicates solid adoption, considering Cortex was only launched a year ago.
Image source: Getty Images.
Snowflake’s revenue growth is slowing
While everything highlighted above sounds great, AI won’t necessarily improve Snowflake’s financial results. The company generated $829.3 million in product revenue in the second quarter, up 30% year over year. That’s a strong growth rate at first glance, but it marked a significant slowdown from the 37% revenue growth Snowflake delivered in the second fiscal year of FY 2024 and the 83% it delivered in the second fiscal year of FY 2023.
Snowflake spent a record $936 million on operating expenses in the second quarter, up 26% from the same period a year ago. Research and development expenses – which are used to develop new products – totaled $437 million this quarter, which was an increase of 40%.
In other words, Snowflake experienced slowing revenue growth despite spending more money on growth-oriented initiatives, which isn’t a good sign. It also had a major impact on the company’s bottom line: net loss was $316.9 million for the quarter, up 40% from the same quarter last year.
There are indications that the spending will pay off going forward, as Snowflake’s remaining performance obligations (RPOs) rose 48% to $5.2 billion in the second quarter. The company expects to convert half of that order backlog into revenue within the next 12 months, but offers no guidance for the rest. possible Accelerated sales growth could follow, but that is not a certainty.
Snowflake’s valuation is another drawback
Despite the 71% drop in Snowflake stock from its all-time high, it’s fair to say it’s still quite expensive. Based on the company’s trailing-twelve-month product sales of $3.1 billion and market cap of $38.2 billion, the stock trades at a price-to-sales (P/S) ratio of 12.
It is difficult to compare Snowflake to other publicly traded companies due to its unique product portfolio. However, Microsoft, AmazonAnd Alphabet are the three largest cloud service providers in the world, and they also happen to be leaders in AI.
Based on the P/S ratio, Snowflake is slightly cheaper than Microsoft, but much more expensive than Amazon and Alphabet:
PS Ratio data by YCharts
I think Snowflake’s valuation is still too high on that basis. All three tech giants have track records spanning decades, and each of them is highly profitable, while Snowflake continues to burn significant amounts of cash.
In my opinion, Snowflake stock was never a good fit for Berkshire’s portfolio. Buffett likes to invest in companies with steady growth and robust profitability because they often have the flexibility to return money to shareholders through dividends and stock buybacks. Snowflake does have a buyback program, but that may not be sustainable given the company’s growing losses, and that also likely rules out dividend payments in the near future.
However, Snowflake is in the wheelhouse of Gerstner and his Altimeter fund, as he focuses exclusively on technology stocks. That’s probably why he still owns 9.2 million shares in the company. He expanded his positions in stocks such as Alphabet, Amazon and Uber Technologies in the first half of this year, and since they may have better near-term prospects than Snowflake, don’t be surprised if he continues to sell to free up capital for those opportunities.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia, Snowflake, and Uber Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
