Warren Buffett sold his entire stake of 6.1 million shares in Snowflake – the Bozeman, Montana-based provider of data storage, processing and analytics services.

After profiting from Snowflake’s IPO in September 2020, Buffett held on to his holdings as they rose to their high of $405 per share in October 2021 before losing about 68 percent of that value.

The stock fell slightly in late afternoon trading after it was announced on August 15 that Buffett had sold $989 million worth of his Snowflake shares in the second quarter. Market observation.

Is Snowflake an absolute buy at today’s price? The reasons not to buy the stock seem compelling. According to Investing.com, Analysts have expressed concern about the following headwinds:

• New management.
• Increased competition.
• Customers switching from Snowflake after a data breach.
• A second quarter earnings report that may not beat expectations and raises guidance.

After interviewing Snowflake’s new CEO a few months ago, I agree with many of these concerns and expect the stock to be highly volatile on August 21st when the company releases its Q2 report.

New management

Investors were less than thrilled when Frank Slootman – who led the company’s IPO in 2020 – announced his retirement on February 28, 2024, according to a June 2024 report. Forbes Post.

In June 2023, Slootman denied a report that he planned to retire, but in the February announcement he gave a disappointing product sales forecast for the new fiscal year, as my book shows. Brain Rush: How to invest and compete in the real world of generative AISnowflake shares promptly lost 20% of their value.

Sridhar Ramaswamy is a former Google executive who joined us in 2023 after Snowflake acquired Neeva, his AI-focused startup. “2023 is the year of AI,” Ramaswamy told me in December 2023, according to my Forbes Post.

Ramaswamy described a path to expanding AI capabilities for Snowflake’s customers. “First, we have the ability to synthesize information in a fluid conversation through ChatGPT with Neeva,” he said.

Snowflake developed this vision in stages. Search can be done via frequently asked questions. Next, the company is offering Copilot to simplify the writing of SQL code and thus enable faster access to the data. “We are building out the ability to query data in real time,” Ramaswamy concluded.

Ramaswamy doesn’t care about beating expectations and raising forecasts every quarter. “When it comes to earnings reports, we have a big team,” he said in June.

He has a longer-term perspective. “We’ve done it together. I’m comfortable and enjoying being CEO,” he added. “Google’s advertising business has grown 36% every year for 15 years. We have a broader vision of a true data cloud as the nervous system of the company.”

How does he feel about being CEO of a public company for the first time? “As far as being CEO of a public company goes, the closest I came to that was when I was CEO at Google,” Ramaswamy noted.

“I led a very large team across technology, product and partnerships,” he added. “It was a more diverse job. Neeva was wonderful, but I am better suited to lead a team, technology and product vision, and operational excellence,” he concluded.

Increased competition

Wells Fargo cut its rating on Snowflake shares to Equal Weight from Overweight and reduced its price target by 35% from $200 to $130. “The narrative has changed significantly,” Wells Fargo analysts noted. Investing.com.

Snowflake competes with Databricks, Amazon Web Services and Microsoft Azure, “all of which offer comprehensive solutions that challenge Snowflake’s market share,” Wells Fargo analysts argued, according to Invezz.

Snowflake’s strongest competition could come from privately held Databricks. “Databricks’ data intelligence platform is a force to be reckoned with in the cloud data management space,” said Raymond James analyst Simon Leopold in a report published by Investors Business Daily.

“And Databricks’ success has likely come in part at Snowflake’s expense. In 2023, Databricks grew its revenue 50% to $1.6 billion, while Snowflake reported $2.8 billion, or 36% growth. Both companies have evolved and increasingly expanded into each other’s markets,” Leopold added.

These competitors are fighting for the best talent, and Snowflake is moving aggressively to win its share. In May, Snowflake announced that it would “hire approximately 35 employees from TruEra, which last raised $25 million in 2022,” noted Bloomberg.

The competition for the best AI talent who can train the best large language models is fierce. “We will opportunistically look for acquisitions,” Ramaswamy said Bloomberg“In my opinion, the number of people who can really train first-class fundamental models right now is vanishingly small – I would say about a few hundred people.”

Customers switch from Snowflake after data breach

Even more threatening is one analyst’s statement that some customers are switching to Snowflake’s competitors due to data breaches.

In July, AT&T disclosed a data breach that had occurred several months ago and affected nearly all of its wireless customers. The breach involved information stored on Snowflake’s cloud platform. Snowflake’s stock initially fell, but later recovered “after it became clear that other companies had already reported similar problems,” noted Barron’sSnowflake said the security breaches were not caused by a bug in the company’s software or cloud platform.

High-value Snowflake accounts may shift their business elsewhere. “Several customers affected by the breach” have “plans to move away from SNOW,” Wells Fargo analysts wrote, according to Investors.com.

Second quarter earnings report may not exceed expectations and raises forecast

Expectations for Snowflake’s near-term growth are modest. Snowflake faces challenges due to high semiconductor costs. “We have headwinds related to GPU-related costs as we invest in new AI initiatives,” CFO Mike Scarpelli told investors during a conference call in May.

He added the following forecasts for the company’s fiscal year 2025:

• Product sales forecast for fiscal year 2025: approximately $3.3 billion, representing growth of 24%.
• Fiscal 2025 non-GAAP product gross margin guidance: 75%.
• FY 2025 non-GAAP free cash flow margin forecast: 26%.

Investors may need to be patient for Snowflake’s AI strategy to pay off. Snowflake “stands at a crossroads in its business,” wrote William Blair analyst Jason Ader in a report published by IBD.

“The company does not expect most new AI offerings to make a significant material contribution until fiscal 2026 at the earliest, as the current aggressive investment policy in research and development and sales and marketing will put margins under pressure in the short term,” noted Ader..

Another analyst expects Snowflake’s new products to not contribute significantly to revenue any time soon, meaning the company “faces a near-term revenue growth hole,” Wells Fargo wrote.

Wells Fargo analysts further reduced expectations by lowering “their revenue and earnings estimates for fiscal 26 and 27.” Investing.com reported.

If Snowflake beats lowered expectations and raises its forecast, its shares could rise. Otherwise, Wells Fargo will be right.