Check Out The Artificial Intelligence (AI) Stock Warren Buffett Just Sold Out Of – I’m Not Surprised

Warren Buffett is the chairman and CEO of the Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) investment company. Berkshire wholly owns several well-known companies, including GEICO Insurance and Dairy Queen, but it also owns 47 publicly traded stocks and securities.

During Buffett’s 59-year tenure, Berkshire has delivered a compound annual return of 19.8% to its investors. In other words, a $1,000 investment in Berkshire stock in 1965 would be worth $42.5 million today. The same investment in Berkshire stock S&P 500 would have reached only $328,500.

The conglomerate’s portfolio includes a multitude of high-quality stocks such as Apple, Coca-ColaAnd American Expressbut in 2020 it acquired a small stake in a cloud computing company Snowflake (NYSE: SNOW)In my opinion, Snowflake was not a good fit for Berkshire’s portfolio, nor did it fit into Buffett’s proven investment strategy.

However, according to Berkshire’s 13-F filing for the second quarter of 2024 (ended June 30), the conglomerate sold all of its Snowflake shares. Here’s why I’m not surprised.

Snowflake turns to artificial intelligence

Snowflake specializes in developing data clouds that help organizations break down siloed data into a unified well of information that they can then extract maximum value from and use in their daily operations. Since data is the well that every artificial intelligence (AI) model draws from to generate the answers it needs, Snowflake is well-positioned to build products in this space.

Last year, the company launched Cortex AI, a platform designed to enhance the capabilities of the data cloud and help organizations leverage their data to build AI applications. To accelerate their progress, Snowflake customers can access ready-to-use large language models (LLMs), such as Mistral Large and Meta-platforms“Llama 3, on Cortex.

The platform also comes with a host of useful AI tools. Document AI allows businesses to quickly extract valuable data from unstructured sources like contracts and invoices, and Cortex Search understands natural language, allowing developers to quickly retrieve data using a simple prompt.

Cortex AI also features an AI-powered virtual assistant called Copilot that can understand the context behind an organization’s data so it can offer code suggestions and even convert natural language into code, which can save developers a lot of time.

As of the end of Snowflake’s second quarter of fiscal 2025 (ended July 31), the company said that about 2,500 of its 10,249 customers were using its AI products and services each week, which is a fairly high adoption rate considering most of them were launched only in the past year.

Snowflake’s revenue growth slows as losses widen

Snowflake generated $829.3 million in product revenue during the second quarter, a 30% increase over the same period last year. While the result was better than management’s guidance, this growth rate still marked a sequential and annual slowdown. Unfortunately, slowing revenue growth has been a recurring theme for Snowflake over the past few years.

This is a problem because Snowflake is investing heavily in new products to compete in the AI ​​race. The company reported record operating expenses of $936 million in the second quarter, a 26% increase from the same period last year. Research and development expenses alone came in at $437.6 million, an increase of nearly 40%.

That resulted in a net loss of $316.9 million, a 40% increase from the same quarter last year. In other words, Snowflake is burning a lot of cash on the bottom line, and it doesn’t even have any steady — let alone accelerating — revenue growth to show for it.

Spending isn’t expected to slow down anytime soon, as the company continued to add more employees in the second quarter. Its headcount reached a record 7,630 at the end of the quarter, up 14% from a year earlier.

On the bright side, Snowflake reported $5.2 billion in remaining performance obligations (RPOs) at the end of the second quarter, a 48% increase. RPOs typically reflect the backlog of orders from customers who sign long-term contracts. The company expects to convert half of its RPOs into revenue within 12 months, but it doesn’t disclose how long it will take to convert all of them. So it’s possible that this could lead to accelerated revenue growth going forward, but it’s not a guarantee.

Why Snowflake Wasn’t Right for Buffett’s Portfolio

Warren Buffett looks for several qualities in a company when deciding whether to invest. These include consistent growth, solid profitability, a strong management team, and shareholder-friendly programs such as dividend plans and share buybacks. When he finds a company he likes, he also wants to pay a fair price.

Snowflake continues to grow and even has a share buyback program. However, the company’s mounting losses will likely prevent it from introducing a dividend or expanding its share buybacks in the future. Additionally, while Snowflake has enough cash and cash equivalents ($3.2 billion) to support its short-term losses, those losses will eventually hamper the company’s ability to invest in growth initiatives like marketing and research and development.

Achieving profitability will therefore be crucial at some point, but the potential cost reductions needed to achieve it could lead to even slower revenue growth.

Next, there’s Snowflake’s valuation. Since the company doesn’t generate profits, we can value it using the price-to-sales (P/S) ratio — market capitalization divided by annual revenue. Based on Snowflake’s market cap of $39.5 billion and its trailing-12-month revenue of $3.1 billion, its stock is trading at a price-to-sales ratio of 12.9.

It’s quite expensive. Cloud industry leaders like Microsoft, AmazonAnd Alphabet are cheaper, even though Microsoft Azure and Google Cloud are experiencing similar revenue growth to Snowflake. All three tech giants have diversified portfolios of other growing businesses, while Snowflake does not.

SNOW PS Ratio data by YCharts

Berkshire bought Snowflake stock when it went public in 2020, likely netting around $120 per share. It was a small position that represented less than 0.5% of the conglomerate’s $312 billion portfolio. We don’t know which Berkshire investment manager made the official decision to buy, but it was likely one of Buffett’s lieutenants.

The second-quarter low for Snowflake stock was $124.21, so given the conglomerate’s entry point, Berkshire likely didn’t lose any money on the sale. The return, however, was poor given the four-year holding period.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. American Express is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, 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.