Warren Buffett and his team at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) are some of the best investors ever. They are known for their philosophy of value investing, and so it may have surprised some people when they took a position in a fast-growing company like Snowflake (NYSE: SNOW) when it debuted on the public market in late 2020.
However, as of June 30, Berkshire no longer owns any Snowflake shares, having sold them in the second quarter. I think Berkshire exited its position in Snowflake at the potentially worst possible time. But for Buffett & Co., it may have been a good move.
Snowflake wasn’t Berkshire’s average investment
Warren Buffett isn’t the only investor with influence at Berkshire Hathaway. Todd Combs and Ted Weschler also get to make decisions and are known to be more growth-oriented than Buffett, even though value investing is at the core of what they do. This brings up an important caveat to the value investing philosophy: Even growth companies can be considered value stocks if the right conditions hold. Take Applefor example, when Berkshire first bought Apple stock, it was still growing, but it was also dirt cheap.
But it looks like the crew at Berkshire has lost faith in Snowflake. Berkshire bought Snowflake shares at a pre-IPO price of $120 per share, which was a fantastic deal considering the stock had started trading around $245 that day. While Snowflake shares traded at an average of $148 per share in Q2, there were two ranges: before and after Q1 earnings, which were released on May 22. If Berkshire sold before earnings, it likely got around $155 per share; if it sold after, it likely got around $125.
What is so special about this price difference?
About a month after the close of Snowflake’s 2024 fiscal year (which ends on January 31), longtime CEO Frank Slootman retired. Sridhar Ramaswamy, who leading Snowflake’s AI strategyreplaced him, and his first quarter did not go well. Shares fell 5% the day after the May 22 quarterly report and are now down about 20% since the close just before the report.
Snowflake’s growth is starting to slow down and the company is still far from being profitable. It also had a problem with a data breach that made many investors lose confidence.
With a murky path to profitability, Berkshire may have decided enough was enough and got out while it still had its investment. But I think that was a premature move.
Snowflake still has a huge catalyst yet to be realized
Snowflake offers customers software to manage data in a cloud environment. This product has seen widespread adoption and growth in recent years, and with the rise of artificial intelligence (AI), it could become an even bigger business. If every company wants to have its own AI model tailored to its business, it will need a lot of data to train it. Snowflake benefits from this immediately, but this increase in demand may take a year or two.
Berkshire isn’t the only group to lose faith in Snowflake; many more have run for the exit, causing the price to fall. As a result, Snowflake’s valuation is at an all-time low from a price-to-sales (P/S) standpoint.
At 14 times revenue, Snowflake could almost be considered a value play again (I’m kidding!). While 14 times revenue is still very expensive for most companies, the potential for Snowflake is high because of the software business.
It’s not uncommon for companies like Snowflake to achieve a profit margin in the 20% to 30% range. However, Snowflake isn’t even close to that right now, with a profit margin of -38% in Q1. This is because Snowflake is investing heavily in growth due to the massive opportunity in front of them.
Analysts expect huge growth for Snowflake, with revenue expected to reach around $5.3 billion in fiscal 2027 (end of January 2027).
A lot can happen in the next two and a half years, and if Snowflake hits those revenue targets and achieves a 20% profit margin, it would bring in about $1.06 billion in profits. The current valuation would value the stock at about 40 times those earnings, which is pretty average for a mature software stock.
There are a lot of “ifs” in those predictions, but investors shouldn’t close the door on Snowflake just yet. This may be the worst time to sell Snowflake stock, and I think investors should hold on to what they have (or consider buying more), as Snowflake’s better days are yet to come.
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Keithen Drury has positions in Snowflake. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Snowflake. The Motley Fool has a disclosure policy.
Warren Buffett’s Berkshire Hathaway is selling its Snowflake shares. Don’t follow. was originally published by The Motley Fool
