The Snowflake Melted for Berkshire Hathaway

We analyze Berkshire Hathaway's decision to sell all Snowflake shares in Q2 2024. We delve into Snowflake's rise and fall, the rationale behind Berkshire's sale, and the lessons learned for investors. Was Warren Buffett right with this move?

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Introduction

In the world of investing, few names command as much respect and admiration as Warren Buffett. Known for his astute investment strategies and long-term vision, Buffett's decisions are closely watched by investors around the globe. Recently, Berkshire Hathaway made headlines by selling its entire 6.1 million share holdings in Snowflake, valued at somewhat short of $1 billion, during Q2 2023 ^{1 10}. This bold move has sparked discussions and debates among shareholders and market analysts alike.

Historically, Berkshire Hathaway has demonstrated a keen eye for both acquiring and divesting assets at opportune moments. From the iconic purchase of Coca-Cola shares in the late 1980s to the strategic exit from IBM in 2018, Buffett's decisions have often been seen as a bellwether for market trends. The decision to invest in Snowflake at a pre-IPO price of $120 per share ² was initially met with enthusiasm, given the company's innovative approach to cloud-based data solutions. However, the subsequent decision to sell has raised questions about the underlying reasons and the potential implications for both Berkshire Hathaway and Snowflake.

The purpose of this article is to delve into the aftermath of Berkshire's decision to sell Snowflake shares ↗. We aim to provide a comprehensive analysis of the factors that influenced this move, the current state of Snowflake, and the broader economic and market context. As shareholders of Berkshire Hathaway, your understanding of these dynamics is crucial in assessing the impact of this investment decision on your portfolio.

Stay with us as we navigate through the highs and lows of Snowflake's journey, explore the rationale behind Berkshire's strategic exit, and offer insights into what the future might hold for both entities.

The Rise and Fall of Snowflake

When Snowflake made its debut on the stock market, it was nothing short of a spectacle. The company's IPO was one of the most highly anticipated events in the tech world, with shares beginning to trade at around $245 per share ². The initial excitement was fueled by Snowflake's revolutionary cloud-based data platform, which promised to transform how businesses handle and analyze vast amounts of data. Investors were captivated by the company's potential, and its stock price soared to a peak of $405 a share in October 2021 ¹.

However, the euphoria was short-lived. Snowflake's stock experienced a dramatic decline, losing roughly 68% of its value from its peak ¹. Several factors contributed to this downturn. Increased competition from industry giants like Databricks, Amazon Web Services, and Microsoft Azure began to erode Snowflake's market share ¹. Additionally, the company faced significant internal challenges, including management changes and strategic shifts.

Berkshire Hathaway's entry into Snowflake was marked by a strategic purchase at a pre-IPO price of $120 per share ³. This move was seen as a vote of confidence in Snowflake's innovative capabilities and growth potential. For a time, this investment seemed to pay off handsomely as Snowflake's valuation skyrocketed. However, the subsequent market dynamics painted a different picture. The initial success was driven by Snowflake's cutting-edge product offerings and strategic partnerships, which positioned it as a leader in the cloud data space.

Despite these strengths, Snowflake encountered several formidable challenges. The retirement announcement of Frank Slootman, the company's former CEO, and the disappointing product revenue forecast that followed, led to a 20% drop in the stock price ¹. The transition to new leadership under Sridhar Ramaswamy, a former Google executive, brought a new vision focused on AI capabilities, but also introduced uncertainty and skepticism among investors ¹. Furthermore, a significant data breach involving Snowflake's cloud platform and the subsequent customer exodus exacerbated the company's woes ¹.

Snowflake's journey from its IPO hype to its current struggles serves as a poignant reminder of the volatile nature of the tech industry. As we move forward, it is essential to understand how these developments influenced Berkshire Hathaway's decision to sell and what this means for the future of both entities.

Berkshire's Decision to Sell

Warren Buffett's decision to sell Berkshire Hathaway's entire 6.1 million share holdings in Snowflake during Q2 2023 was driven by several key factors. First and foremost, the high valuations of Snowflake stock were inconsistent with Buffett's investment philosophy, which traditionally avoids IPO stocks and favors long-term value investments. Snowflake's stock, despite its initial promise, had become a volatile asset, not aligning with the conservative and value-oriented approach that Buffett is renowned for ⁶.

The timing of the sale was strategic, occurring in Q2 2023 when Snowflake's stock averaged around $148 per share ↗. Depending on the exact timing within the quarter, Berkshire could have sold shares at prices ranging from approximately $125 to $155 per share. This timing allowed Berkshire to exit its position before further potential declines, especially considering the stock's subsequent performance and the broader market pressures on tech stocks ².

Berkshire's investment in Snowflake began at a pre-IPO price of $120 per share. With the sale prices presumably ranging between $125 and $155 per share, Berkshire realized a gain per share of between $5 and $35. Given the holding of around 6 million shares, the total profit realized from the sale was between $30 million and $210 million. This strategic exit allowed Berkshire to secure a significant return on its investment, albeit within a volatile market environment ³.

Warren Buffett's investment philosophy emphasizes long-term value and stability over short-term gains and speculative investments. The decision to sell Snowflake aligns with this philosophy, as the stock's high valuation and lack of profitability made it an outlier in Berkshire's typically conservative portfolio. Buffett's distaste for IPO stocks and preference for established, profitable companies further reinforced the rationale behind this decision ⁶.

For shareholders, Berkshire's decision to sell Snowflake offers several key lessons:

• Valuation Matters: High valuations can be risky, especially in volatile sectors like tech.
• Consistency with Philosophy: Aligning investments with a clear, long-term strategy is crucial.
• Timing is Key: Strategic timing in buying and selling can significantly impact returns.
• Adaptability: Being willing to exit positions that no longer fit the investment criteria is essential for long-term success.

Snowflake's Current Landscape

The leadership transition from Frank Slootman to Sridhar Ramaswamy marked a significant shift for Snowflake. Slootman's retirement, announced for February 28, 2024, came after issuing a disappointing product revenue forecast, which led to a 20% drop in Snowflake's stock. Ramaswamy, a former Google executive, took over as CEO in 2023 after Snowflake acquired his AI startup, Neeva. His vision for integrating AI capabilities into Snowflake's offerings has been a focal point of his leadership, emphasizing the importance of AI in the company's future strategy ¹.

Under Ramaswamy's leadership, Snowflake has pivoted towards new AI initiatives, aiming to leverage AI to enhance its data analytics and management software. The acquisition of Neeva is a strategic move to bolster these capabilities. Ramaswamy's statement that "2023 is the year of AI" underscores the company's commitment to integrating advanced AI functionalities for its customers. This shift is part of a broader strategy to stay competitive in a rapidly evolving tech landscape ⁵.

Here's how Ramashwamy outlines Snowflake's current situation at CNBC:

Snowflake's recent financial performance has been mixed. The company reported revenue growth of 36% in 2023, reaching $2.8 billion. However, this growth rate represents a slowdown compared to previous years. The forecasted annual revenue growth rate for fiscal 2025 is 26%, down from 36% in fiscal 2024. Additionally, Snowflake reported a $634 million loss for the first six months of fiscal 2025, highlighting ongoing profitability challenges. Despite these hurdles, the company remains committed to aggressive R&D and sales-and-marketing investments, which are pressuring margins in the near term ¹.

Snowflake faces intense competition from major players like Databricks, Amazon Web Services (AWS), and Microsoft Azure. Databricks, in particular, has shown impressive growth, with sales increasing by 50% to $1.6 billion in 2023. Snowflake's consumption-based business model, with 85% of its revenues coming from data analytics jobs on AWS, underscores its reliance on cloud platforms. The competitive landscape is further complicated by the need to innovate continuously to stay ahead of rivals ¹.

The data breach involving Snowflake's cloud platform, which affected nearly all of AT&T's wireless customers, has had a significant impact on customer retention. Although Snowflake clarified that the breaches were not due to flaws in its software or cloud platform, the incident led to multiple breach-impacted customers planning to move off Snowflake. This development poses a challenge for the company as it strives to maintain its customer base and rebuild trust ¹.

Snowflake's current stock valuation reflects the challenges it faces. The stock trades at a price-to-sales (P/S) ratio of 13, which, while typical for growth stocks, is considered high relative to the S&P 500 average of around 3. The company's forecasted annual revenue growth and profitability targets suggest potential for future gains, but the current valuation underscores the market's cautious stance. For investors, this presents a complex scenario where the potential for recovery under new leadership must be weighed against ongoing financial and competitive pressures ⁶.

Economic and Market Context

The broader tech sector trends have been a whirlwind of innovation and volatility, particularly with the rise of AI and cloud computing. Snowflake, a company that sells data analytics and management software on cloud platforms of giants like Amazon, Microsoft, and Google, has been seen as a proxy for cloud computing growth ⁵. However, the sector has faced a slowdown, with Snowflake's stock retreating about 42% in 2024, while the iShares Expanded Tech-Software Sector ETF (IGV) rose by 10% ⁵. This divergence highlights the unique challenges Snowflake faces in a competitive and rapidly evolving market.

Key economic indicators in 2023 have painted a mixed picture. The Federal Reserve's decision to cut the target for the federal funds rate by 50 basis points to a range of 4.75% to 5.0% had a significant impact on market conditions ⁷. Major indices hit all-time highs following the Fed's announcement, indicating a temporary boost in investor sentiment. Retail sales in August rose by 0.1%, and industrial production surged by 0.8%, exceeding the 0.2% forecast, showcasing economic resilience ⁷. However, the 10-year Treasury yield rose from 3.65% to 3.74%, reflecting ongoing concerns about inflation and economic stability ⁷.

Federal Reserve policies have played a crucial role in shaping market conditions. The rate cuts were aimed at stimulating economic growth, but they also led to increased volatility in the stock market. Warren Buffett's famous quote, "The stock market is a mechanism for transferring wealth from the impatient to the patient," underscores the importance of long-term investment strategies in such a fluctuating environment ⁷. Successful investing requires patience and avoiding panic selling, a principle that has guided Berkshire Hathaway's investment philosophy for decades.

When comparing Snowflake's valuation with other big tech companies, it becomes evident that Snowflake faces unique challenges. The company's price-to-sales (P/S) ratio of 13 is significantly higher than the S&P 500 average of around 3, indicating that it is not a bargain by traditional valuation metrics ⁶. In contrast, companies like Google have faced valuation concerns, rising regulatory risks, and deteriorating technical momentum, leading to a downgrade to "Sell" ⁸. The regulatory environment has also become increasingly challenging for big tech companies, with potential antitrust interventions and compliance issues under the Digital Markets Act ⁹. These factors create a complex landscape for Snowflake and its investors.

Drawing historical parallels with past economic cycles can provide valuable insights. The tech sector has always been characterized by rapid innovation and periodic downturns. The current environment, marked by high valuations, regulatory scrutiny, and economic uncertainty, mirrors previous cycles where patience and strategic decision-making were key to long-term success. For Snowflake, navigating this landscape will require not only technological innovation but also a keen understanding of market dynamics and regulatory challenges.

Was Berkshire Right to Sell?

The decision by Berkshire Hathaway to sell its entire 6.1 million share holdings in Snowflake during Q2 2023 has sparked considerable debate among investors. To assess whether this move was justified, we must delve into several critical factors - some of which have been discussed already.

First, let's consider the valuation analysis. Snowflake's valuation has been a point of contention. With a P/S ratio of 13, it is significantly above the S&P 500 average, making it a less attractive option for conservative value investors ⁶. Additionally, Snowflake is not yet profitable and has no price-to-earnings (P/E) ratio, further complicating its investment appeal ⁶. Given Warren Buffett's well-known aversion to IPO stocks and preference for companies with clear earnings potential, the decision to sell aligns with his investment philosophy.

In terms of profit realization, Berkshire's sale of Snowflake shares at prices between $125 to $155 per share resulted in a realized gain per share of between $5 and $35 ³. With around 6 million shares, Berkshire presumably made between $30 million and $210 million from the sale ³. This substantial profit underscores the financial prudence of the decision, especially considering the stock's subsequent decline.

Risk management was another crucial aspect of Berkshire's decision. Snowflake has faced numerous challenges, including new management, increased competition, and customer attrition following a data breach ¹. The retirement announcement of former CEO Frank Slootman and the subsequent 20% drop in stock price further exacerbated investor concerns ¹. These factors, combined with modest guidance and aggressive R&D and sales-and-marketing investments pressuring margins, presented significant risks ¹.

The question of market timing is also pertinent. While some may view the sale as an example of successful market timing, it is more likely a strategic move aligned with Buffett's philosophy of long-term value investing. Buffett has often emphasized that "time in the market trumps market timing," suggesting that the decision was based on a thorough evaluation of Snowflake's long-term prospects rather than short-term market fluctuations ⁷.

Exploring alternative scenarios reveals that holding onto Snowflake shares could have exposed Berkshire to further downside risks. Given the competitive pressures from companies like Databricks, which grew sales by 50% to $1.6 billion in 2023, and Snowflake's own challenges in achieving significant material contributions from new AI offerings until fiscal 2026, the potential upside was uncertain ¹. Conversely, if Snowflake had managed to beat lowered expectations and raise guidance, its shares could have risen, but this was a speculative scenario fraught with risks ¹.

Therefore, Berkshire Hathaway's decision to sell its Snowflake shares appears to have been a well-considered move based on valuation, risk management, and alignment with Buffett's investment philosophy ↗. While the sale may have precluded potential future gains, it also mitigated significant risks, underscoring the importance of strategic decision-making in the ever-volatile tech sector.

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Conclusion

In reviewing Berkshire Hathaway's decision to sell its entire stake in Snowflake, several key insights emerge that underscore the complexities of investing in the ever-evolving tech landscape. The sale, executed at a strategic moment amidst a backdrop of declining stock performance and increasing competition, reflects Buffett's commitment to a disciplined investment philosophy that prioritizes long-term value over speculative gains. By divesting from Snowflake, Berkshire not only realized significant profits but also mitigated potential risks associated with the company's uncertain future.

The long-term perspective championed by Warren Buffett is particularly relevant in today's volatile market. As he famously stated, "The stock market is a mechanism for transferring wealth from the impatient to the patient" ⁷. This philosophy serves as a reminder to shareholders that successful investing requires patience and a focus on fundamental value rather than short-term fluctuations. The broader economic context, including the Federal Reserve's recent rate cuts and the resilience shown in retail sales and industrial production, indicates that while challenges persist, opportunities for growth remain abundant for those willing to adopt a patient approach.

Looking ahead, the future of Snowflake remains uncertain as it navigates leadership changes, competitive pressures, and ongoing profitability challenges. However, under the guidance of new CEO Sridhar Ramaswamy, there is potential for innovation and recovery, particularly with a renewed focus on AI capabilities. For Berkshire Hathaway, the decision to exit Snowflake aligns with its historical strategy of investing in companies with solid fundamentals and long-term growth prospects.

Investor takeaways from this analysis emphasize the importance of aligning investment choices with a clear strategy, understanding the implications of market timing, and recognizing the value of adaptability in an ever-changing environment. Shareholders are encouraged to remain informed and patient, drawing on historical evidence that demonstrates the resilience of the stock market, particularly for value stocks, regardless of interest rate movements ⁷.

The sale of Snowflake shares represents a significant (albeit not a key) moment in Berkshire Hathaway's investment journey, reinforcing the principles that have guided Buffett's success for decades.

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