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It seems like everyone is eager to get in on the artificial intelligence (AI) craze – even Warren Buffett. I mention him specifically because the Oracle of Omaha has long been known as a tech skeptic. “I never invest in companies I don’t understand,” he once famously told an interviewer who asked why he avoided technology.
So, what about the fact that his conglomerate, Berkshire Hathaway Inc. (NYSE: BRK.A), has 47% of its publicly-traded portfolio invested in Apple Inc. (NSD: AAPL)? Not a problem: Mr. Buffett sees Apple as a consumer products business, not a technology company.
This explains why eyebrows were raised when Berkshire Hathaway made a $907 million investment in a little-known tech company with the unusual name of Snowflake Inc. (NYSE: SNOW). It’s not a big position – only 0.3% of the Berkshire Hathaway portfolio, according to John Csiszar, writing for GOBankingRates.com.
“But it does reflect Buffett’s evolving opinion of the types of stocks he should own, even though it’s likely one of his portfolio managers did the actual buying,” Mr. Csiszar writes.
So, what is Snowflake anyway?
The company, which is based in Montana, was founded in 2012 by Benoit Dageville and Thierry Cruanes, both of whom remain with the firm as President of Product and Chief Technical Officer, respectively. It went public in 2020, which is when Berkshire Hathaway took a position.
Together with a team of software developers, Dageville and Cruanes created what they call a Data Cloud. It’s a global network where thousands of organizations can access and share data stored on multiple public clouds. According to the company, the Data Cloud “was designed from the ground up to support machine learning and AI-driven data science applications.”
If you think of it as aiming to become ultimate source of human knowledge, you won’t be far off the mark.
“Snowflake’s platform is the engine that powers and provides access to the Data Cloud, creating a solution for applications, collaboration, cybersecurity, data engineering, data lake, data science, data warehousing, and unistore,” the company says on its website.
Its partners include an impressive list of high-tech companies including Google Cloud, Amazon Web Services, Microsoft Azure, and IBM. Other companies using the service include AT&T, JetBlue, KraftHeinz, Under Armor, and Capital One. The system currently handles 2.9 billion queries a day and rising.
Snowflake’s investor presentations show an impressive growth record. First-quarter revenue (to April 30) for fiscal 2024 was just over $624 million (figures in U.S. dollars), up 48% year-over-year. That looks impressive until you realize that in the year-ago quarter, the revenue growth rate was 85%. For the full fiscal year, the company forecasts revenue of $2.6 billion, a 34% increase over the previous year.
The question investors are asking is whether the new surge of interest in AI will drive those revenues higher, especially in the face of an economic slowdown. Right now, there’s no indication of it. That said, the AI feeding frenzy is just starting.
Another concern is that the revenue growth is not flowing through to the bottom line. Operating loss in the first quarter was $273 million, compared with $189 million in the same period last year. Net loss was $226 million, up from $166 million the year before.
The financial woes have been reflected in the share price. Snowflake traded at over $350 a share in the fall of 2021. Today it’s about half that, closing July 27 at $158.27. That’s not unusual – most tech stocks are well down from their pandemic highs. But right now, Snowflake doesn’t seem to have much traction.
Contrast that with AI superstock Nvidia Corp. (NSD: NVDA), which recently briefly passed the $1 trillion level in market capitalization, joining Apple, Amazon, Microsoft, and Alphabet. Nvidia is the leading manufacturer of GPU chips, which are used by cloud companies and AI developers.
The company recently reported a blow-out first quarter for fiscal 2024 (to April 30). Revenue was $7.19 billion, up 19% from the previous quarter but down 13% from the year before. Earnings per share were $0.82, ahead 28% from last year. But what really excited investors was the projection of $11 billion in revenue in the current quarter. That’s almost $4 billion more than analysts were estimating. The share price shot up 24% in a single day after the results came out. The stock has more than doubled this year. The price/earnings ratio is unattractive, at over 200, but the company is profitable, and if revenues come in as projected, earnings should soar.
The bottom line is we appear to be on the brink of an AI bubble, with investors scrambling to get on board. That could lead to big profits, but remember that all bubbles eventually pop. Right now, Nvidia has momentum on its side. Snowflake has potential and its revenue is growing. Just not by enough to impress the market.
If you have a money question, send it to gordonpape@hotmail.com and write Fund Library Question in the subject line. Sorry, I can’t guarantee a personal response, but I’ll answer as many questions as possible here.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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