Warren Buffett's team at Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) recently released its 13-F for the second quarter of 2024. It revealed many dramatic changes to the portfolio in Q2, and one notable one was its sale of Snowflake (NYSE: SNOW) stock.
Many industry experts touted Snowflake as the future of the data cloud, thanks to its data storage and handling platform. Still, massive financial losses, a data breach, and a surprise change in CEOs may have rattled investors, like Buffett's team, over the last few months.
The question now for investors is whether selling the stock was the right move for Berkshire and whether individual investors should follow. Here's a closer look.
The Berkshire sale
Berkshire invested in Snowflake before its initial public offering (IPO) when the company was still private. When the stock debuted in the public markets in 2020, Berkshire held a position of 6.1 million shares, which it held since the IPO. From a conservative investor's point of view, that may have been the right decision.
Berkshire Hathaway's sale of Snowflake stock wasn't because of the data breach or the sudden replacement of Frank Slootman with Sridhar Ramaswamy as the CEO. Instead, it could have been a correct decision because Snowflake was inconsistent with Buffett's philosophy and, by extension, Berkshire's philosophy. Buffett always disliked IPO stocks, so Buffett's lieutenant Todd Combs, who has had a relationship with Slootman, likely influenced this purchase.
Moreover, Buffett likes bargains. Since Snowflake is nowhere close to profitability and it doesn't have a price-to-earnings ratio (P/E), and even though its price-to-sales (P/S) ratio of 13 is a record low, it is still not a bargain.
SNOW PS Ratio data by YCharts
Add with the still expensive valuation as well as Snowflake's leadership change, the decision to sell makes sense for Berkshire.
Snowflake's remaining attributes
However, from the perspective of a growth-stock investor, it looks like Snowflake's investment thesis is damaged, though not necessarily destroyed. In addition to the aforementioned data breach and CEO change, the company's rapid revenue growth rate was slowing significantly.
In fiscal 2025, the forecasted annual revenue growth rate of 26% is well below the 36% yearly growth in fiscal 2024. That slowdown could make investors wary of Snowflake's high valuation.
Still, stocks like Snowflake have a history of recovering when they address challenges like data breaches. Assuming Snowflake addresses this weakness, the stock could eventually recover.
Moreover, Ramaswamy brings artificial intelligence (AI) experience that Slootman didn't have. His guidance could eventually pay off for Snowflake as it becomes a more AI-oriented company.
Furthermore, while the $634 million loss for the first six months of fiscal 2025 (ended July 31) rose significantly from the $452 million loss in the year-ago quarter, the $688 million in stock-based compensation during that period, a non-cash expense, exceeds that loss. Hence, the free cash flow, which was $390 million in the first half of the fiscal year, is likely a better reflection of its operations. This indicates the company's finances are in better shape than the hefty net loss suggests.
Finally, a 13 P/S ratio, while well above the S&P 500 average of around 3, is not unusual for a growth stock. Thus, if confidence returns, Snowflake's sales multiple could expand again.
Should you follow Buffett's team out of Snowflake?
Your decision should depend on your individual investment philosophy rather than following Buffett's lead. Conservative value investors should consider exiting Snowflake stock. As a growth company with significant challenges and massive net losses, Snowflake stock doesn't reflect the philosophy of more conservative investors.
However, the company's attributes make it look like a somewhat risky but potentially lucrative growth tech stock. If Ramaswamy can turn Snowflake around and improve its finances, the stock can move much higher from these levels. Thus, growth investors may want to consider a position in Snowflake, despite Berkshire's exit.
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Will Healy has positions in Berkshire Hathaway and Snowflake. The Motley Fool has positions in and recommends Berkshire Hathaway and Snowflake. The Motley Fool has a disclosure policy.
