By Gordon Pape, Editor and Publisher
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 denier.
“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 Berkshire Hathaway company has 47% of its portfolio invested in Apple? 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 (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 US 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 to $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 Friday at $175.21. 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 (NDQ: NVDA), which last week passed the $1 trillion level in market capitalization, joining Apple, Amazon, Microsoft, and Alphabet. Nvidia, a recommendation of contributing editor Adam Mayers, 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 blew away 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. Despite a pull-back last week, the stock has still more than doubled this year. The p/e 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.
My recommendation is to buy Nvidia on any significant price pull-back. The shares closed Friday at $393.27.
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