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Warren Buffett and his team at Berkshire Hathaway (BRK.A) are some of the world's most widely followed investors, known for their strategic value investing approach. Their diverse portfolio features substantial stakes in major market-leading companies like Apple (AAPL), and Buffett is known for his history of beating the S&P 500 Index's ($SPX) returns over the long term. As a result, aspiring and veteran investors alike closely monitor Berkshire's quarterly filings to glean insights into what the legendary investor is doing with his money, in an attempt to replicate Buffett's incredible success.
Most of the headlines around Berkshire Hathaway's second-quarter moves have focused on additional selling in Apple, along with a new stake in beaten-down beauty stock Ulta (ULTA). However, Berkshire also dumped its entire stake worth nearly $1 billion in Snowflake (SNOW), as the conglomerate finally gave up on a position it had held since the stock's Wall Street debut.
This high-profile exit by Buffett and Berkshire is yet another blow for Snowflake, as this year has already been marked by a poorly received CEO change and headlines around a wide-ranging cyberattack. So, should investors follow Warren Buffett to the exits on Snowflake? Here's a closer look.
About Snowflake Stock
Founded in 2012, Snowflake (SNOW) is an enterprise software company specializing in cloud-based data warehousing. In September 2020, Berkshire Hathaway purchased $250 million of Snowflake stock at its IPO price of $120, along with another chunk of shares bought at SNOW's higher debut price. The purchases marked Buffett's first entry into the IPO waters since the 1950s, when Ford (F) made its first public trades.
Valued at $44.1 billion by market cap, Snowflake traded below its IPO price as recently as Aug. 8, and is down more than 68% from its December 2020 highs.
Snowflake has invested heavily in artificial intelligence (AI) to enhance its cloud data storage, but competing with established giants like Microsoft (MSFT) and Amazon (AMZN) in the cloud space has proven to be a difficult task. These companies have substantial resources and established positions in the enterprise software and AI markets, which has made it difficult for Snowflake to gain a competitive edge.
This is reflected in the company's performance. Snowflake stock has dipped 33% year to date, while Microsoft is up 12.6%, and Amazon is up 18.7% over the same time frame.
The stock's underperformance began in earnest late in the first quarter of this year, when Snowflake unexpectedly announced the departure of company founder Frank Slootman from the CEO role. That news, coupled with soft revenue guidance, caused SNOW stock to lose 18% in a single session on Feb. 29.
Despite the weak price action, Snowflake shares are still trading at a hefty 211.6 times forward earnings and 12.7 times sales. Both metrics are a significant premium to the tech sector medians, as well as mega-cap rivals like Microsoft and Amazon. This suggests that underperforming SNOW stock is overvalued compared to its peers.
SNOW Set to Report Q2 Earnings
SNOW is set to report earnings after tonight's closing bell, with the consensus calling for a loss of $0.56 per share on revenue of $850.15 million. On an adjusted basis, EPS is projected to reach $0.16, down from $0.22 last year.
After its fiscal first-quarter earnings report in late May, which fell short of EPS estimates, SNOW dropped more than 5% on the day.
AT&T Attack Dents Snowflake's Reputation
Over the summer, Snowflake was hit with more negative news when AT&T (T) identified its software as the source of a cyberattack that affected nearly all of its U.S. customers, with 109 million accounts impacted.
The hacking campaign exploited stolen login credentials rather than breaching any particular weakness in Snowflake's systems directly, according to Mandiant, but this breach has put a massive dent in Snowflake's reputation and raised questions about its commitment to safeguarding data in the cloud - particularly with other major customers like Ticketmaster and LendingTree impacted.
What Do Analysts Say About Snowflake Stock?
The recent hacking incident was a major factor when Wells Fargo analysts downgraded Snowflake last week to "Equal-weight" from "Overweight," and cut the stock's price target from $200 to $130.
"Shares are now back to similar levels as when we launched on SNOW (January 2023), but the narrative has shifted meaningfully — including new management, rising competitive intensity (vs. Databricks, hyperscalers), questions around tech moats/stickiness (i.e. Iceberg/open formats) and now potential for churn from a recent data breach," explained a group of analysts led by Michael Turrin, who added that their quarterly customer survey unearthed "multiple breach impacted customers stating plans to move off of SNOW, inc. two >$25M in ARR and another >$5M."
Overall, Wall Street is still bullish on SNOW, with the consensus rating set at a "Moderate Buy." Out of 41 analysts covering the stock, 25 have a "Strong Buy" rating, three have a "Moderate Buy" rating, 11 maintain a "Hold" rating, and two have a "Strong Sell" rating. The mean price target is $187.97, about 40% overhead.
The Bottom Line on SNOW Stock
Snowflake is currently facing some serious headwinds, including its lack of profitability. Its expenses for AI are rising, and widening losses suggests it's still struggling to manage these high operating costs in an extremely competitive market. With a new CEO at the helm, the stakes are high for Snowflake's turnaround - which suggests the company has extremely little margin for error over the next few quarters as it attempts to drive meaningful growth.
On the date of publication, Nauman Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
