Warren Buffett is one of the greatest investors of all time. He drove the Berkshire Hathaway investment company to a 4,300,000% increase in value since taking the helm in 1965, crushing the 31,200% gain in the S&P 500 over the same period.

Berkshire manages a portfolio of publicly traded stocks and securities worth $370.9 billion, many of which feature steady growth, robust profitability, strong management teams, and shareholder-friendly features like stock buybacks and regular dividend payments. Buying companies with those qualities is the recipe for Buffett’s long-term success.

However, Buffett isn’t the only manager at Berkshire with the freedom to buy stocks. In 2020, the fund bought shares of Snowflake (NYSE: SNOW) ahead of its initial public offering. The cloud computing company doesn’t fit within Buffett’s usual criteria at all — while it’s growing nicely, it continues to lose money and it doesn’t return any cash to shareholders.

A digital rendering of a snowflake that looks like a computer board.A digital rendering of a snowflake that looks like a computer board.

Image source: Getty Images.

Artificial intelligence is becoming a key part of Snowflake’s business

Snowflake’s Data Cloud is a great tool for large, complex organizations that use multiple providers of cloud services. It allows them to break down silos by aggregating their data in one place, where valuable insights can be extracted more effectively.

Since data is the lifeblood of artificial intelligence (AI), Snowflake’s focus on data management makes it the perfect candidate to develop products in this emerging industry. The company introduced Cortex AI last year, which is a new platform that helps businesses realize their AI goals. Customers using Snowflake Cortex can quickly build AI chatbots using a mixture of their own data and ready-made, open-source large language models (LLMs) like Llama.

Cortex also comes with several new AI tools built by Snowflake. Copilot is an AI-powered virtual assistant designed to accelerate workflows across the Snowflake platform, and Document AI allows companies to rapidly extract data from unstructured sources like contracts and invoices. Then there is Universal Search, which enables all employees — even those in non-technical roles — to find the data they need using natural language in their search queries.

Cortex was only released publicly in May, and 750 of Snowflake’s 9,822 customers already adopted it.

But AI isn’t everything

Buffett rarely invests in technology stocks himself, because he prefers to stick with businesses inside his wheelhouse. Therefore, it’s likely one of his lieutenants made the Snowflake purchase back in 2020, especially considering the company’s financial attributes.

Snowflake generated $789.6 million in product revenue during the recent first quarter of fiscal 2025 (ended April 30), which was a 34% increase year over year. That is a strong growth rate, but it marked a deceleration from the year-ago quarter when revenue grew by 50%. If Snowflake was slashing costs (like marketing) to manage its profitability, the slowing revenue growth would be easily explained because the company would be creating fewer business opportunities. But that doesn’t appear to be the case.

During Q1, the company spent 31% more on operating expenses compared to the year-ago period, which included a 48% increase in research and development costs. That resulted in a net loss of $316.9 million, a 40% jump from Q1 last year.

Snowflake’s sharp increase in research and development costs is understandable given the pace with which the company is rolling out its Cortex AI platform. However, the combination of slowing revenue growth, increasing costs, and growing losses might be a recipe for a stagnant stock price.

Snowflake stock remains expensive

Snowflake stock is trading above its IPO price of $120, so Berkshire is sitting on a small profit. But the stock is 60% below its all-time high of $392, which was set in late 2021, so it has been steadily declining for nearly three years.

But the story gets worse. Based on Snowflake’s trailing 12-month revenue of $3 billion and its market capitalization of $51.6 billion, the stock trades at a price to sales (P/S) ratio of 17.2. That’s even more expensive than the 13.5 P/S ratio of Microsoft, which is the world’s largest company and a leader in cloud computing and AI software.

Snowflake is forecasting $3.4 billion in product revenue for the whole of fiscal 2025, which unfortunately would represent growth of just 24% year over year, implying the deceleration in growth still has legs. It’s very hard to justify paying a premium P/S ratio for this stock right now on that basis.

Snowflake will likely benefit significantly from the AI revolution, but Berkshire might be glad its $947 million holding in the stock only represents 0.3% of its total portfolio. If the company can’t find a way to accelerate its top-line growth, there is a strong possibility its stock could continue to fall from here on the basis of its rich P/S ratio.

Therefore, investors might do well to avoid Snowflake stock for now, until it either finds more growth or becomes substantially cheaper.

Should you invest $1,000 in Snowflake right now?

Before you buy stock in Snowflake, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Snowflake wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $652,342!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of May 28, 2024

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Microsoft, and Snowflake. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Warren Buffett’s Berkshire Hathaway Owns an Artificial Intelligence (AI) Stock You Might Want to Avoid (for Now) was originally published by The Motley Fool

Source link