Warren Buffett and his team at Berkshire Hathaway (BRK.A) are some of the world’s most widely followed investors, renowned for their strategic value investing approach. Their portfolio boasts significant stakes in major companies like Apple (AAPL), and Buffett is celebrated for consistently outperforming the S&P 500 Index over the long haul. Consequently, both novice and seasoned investors meticulously scrutinize Berkshire’s quarterly filings to gain insights into the investment decisions of this legendary figure, hoping to emulate his remarkable success.
The recent focus on Berkshire Hathaway’s second-quarter activities has revolved around increased selling in Apple, as well as a new position in the depreciated beauty stock Ulta (ULTA). Nonetheless, notably, Berkshire also divested its entire nearly $1 billion stake in Snowflake (SNOW), relinquishing a position it held since the stock’s Wall Street debut.
This high-profile exit by Buffett and Berkshire constitutes yet another setback for Snowflake, which has already weathered challenges such as a less-than-ideal CEO change earlier this year and ramifications from a wide-ranging cyberattack. The pertinent question now emerges: should investors heed Warren Buffett’s lead and exit their positions in Snowflake? Let’s delve deeper into the matter.
The Journey of Snowflake Stock
Established in 2012, Snowflake (SNOW) is an enterprise software company specializing in cloud-based data warehousing. Berkshire Hathaway invested $250 million in Snowflake stock at its IPO price of $120 in September 2020, marking Buffett’s first foray into IPOs since the 1950s. Currently valued at $44.1 billion by market cap, Snowflake has plummeted over 68% from its peak in December 2020.
Snowflake has heavily bet on artificial intelligence (AI) to bolster its cloud data storage capabilities, yet vying with established industry giants like Microsoft (MSFT) and Amazon (AMZN) in the cloud arena has posed substantial hurdles. The formidable resources and entrenched market positions of these tech behemoths have impeded Snowflake’s quest for competitive advantage, resulting in lackluster performance. While Snowflake’s stock has dipped 33% year-to-date, Microsoft has surged 12.6%, and Amazon has seen an 18.7% rise over the same period.
Analyst Perspectives and Snowflake’s Outlook
Snowflake is scheduled to release its second-quarter earnings after the market close today, with anticipated losses of $0.56 per share on revenue of $850.15 million. Adjusted EPS is projected to decline to $0.16 from $0.22 in the previous year. Following the fiscal first-quarter earnings report in late May, which fell short of estimates, Snowflake witnessed a more than 5% drop in its stock price on that day.
Challenges and Downgrades
Over the summer, Snowflake encountered further setbacks when AT&T (T) linked a cyberattack affecting nearly all U.S. customers to Snowflake’s software. While the breach exploited stolen login credentials rather than exploiting inherent weaknesses in Snowflake’s systems, it significantly tarnished Snowflake’s reputation and cast doubts on its data protection standards, especially with other major clients like Ticketmaster and LendingTree also affected.
The fallouts from the hacking incident played a pivotal role in Wells Fargo analysts downgrading Snowflake to “Equal-weight” from “Overweight,” with a lowered price target of $130. The analysts highlighted various concerns, including the impact of the recent data breach and escalating competition, signaling changed dynamics and a potential exodus of customers affected by breaches.
Final Thoughts on SNOW Stock
Snowflake faces formidable headwinds, driven by its ongoing lack of profitability and rising AI-related expenses. The company’s widening losses underscore its struggle to manage steep operational costs in a fiercely competitive landscape. With a new CEO steering the ship, Snowflake finds itself on a tightrope, with minimal room for error as it strives to ignite substantial growth over the forthcoming quarters.