Warren Buffett’s Berkshire Hathaway is selling its snowflake stock. Don’t Follow.

Warren Buffett and his team at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) they are some of the best investors ever. They are known for their value investing philosophy, which is why it may have surprised some people when they took a position in a high-growth company such as Snowflake (NYSE: SNOW) when it debuted on the public markets in late 2020.

However, as of June 30, Berkshire no longer owns Snowflake shares, having sold them in the second quarter. I think Berkshire exited its position in Snowflake at the worst possible time. But for Buffett & Co., it may have been a good move.

Snowflake was not your average Berkshire investment

Warren Buffett is not the only influential investor at Berkshire Hathaway. Todd Combs and Ted Weschler also get to make decisions and are known to be more growth-oriented than Buffett, although value investing is at the heart of what they do. This brings an important caveat to the value investing philosophy: Even growth companies can be considered value stocks if the right conditions persist. Take Applefor example. When Berkshire first bought Apple stock, it was still growing, but it was also very cheap.

But it seems the Berkshire crew has lost faith in Snowflake. Berkshire bought Snowflake stock at a pre-IPO price of $120 per share, which was a fantastic deal since the stock started trading at around $245 that day. Although Snowflake shares traded at an average of $148 in Q2, there were two ranges: before and after Q1, earnings were released on May 22. If Berkshire sold before earnings, it probably made about $155 per share; if it sold after, it was probably around $125.

So what’s with the big price difference?

About a month after the end of Snowflake’s 2024 fiscal year (which ended Jan. 31), its longtime CEO Frank Slootman retired. Sridhar Ramaswamy, who had been driving Snowflake’s AI strategyreplaced him, and his first quarter did not go well. The stock fell 5% the day after the May 22 quarterly report and is now down about 20% from its closing price just before the report.

Snowflake’s growth is beginning to slow, and the company is nowhere near profitability. It also had a data breach issue that caused many investors to lose confidence.

With a cloudy path to profitability, Berkshire likely decided enough was enough and exited while it still had investments. But I think this was a premature move.

Snowflake still has a massive catalyst to make

Snowflake provides customers with software for managing data in a cloud environment. This product has seen widespread use and growth over the past few years, and with artificial intelligence (AI) starting to take off, it could become an even bigger company. If each company wants to have its own AI model tailored to its business, it will need a lot of data to train it. This directly benefits Snowflake, but this demand ramp may still have a year or two to go.

Berkshire isn’t the only group to lose faith in Snowflake; many others headed for the exits, sending the price down. As a result, Snowflake’s valuation is at a price-to-sales (P/S) low.

At 14 times sales, Snowflake stock could once again be considered a value play (I’m only half kidding here!). Although 14 times sales is still very expensive for most companies, the potential for Snowflake is high due to its software business.

It’s not unusual for companies like Snowflake to achieve a profit margin in the 20% to 30% range. However, Snowflake is currently nowhere near that, with a negative 38% profit margin in Q1. This is because Snowflake is investing heavily in growth due to the massive opportunity in front of it.

Analysts see huge growth for Snowflake, with estimated revenue of around $5.3 billion in fiscal 2027 (ends January 2027).

A lot can happen over the next two and a half years, and if Snowflake hits those revenue targets and achieves a 20% profit margin, it would generate profits of about $1.06 billion. Today’s valuation would value the stock at about 40 times earnings, which is pretty average for a mature software stock.

There are a lot of “ifs” in those projections, but investors shouldn’t slam the door on Snowflake just yet. Right now is perhaps the worst possible time to sell Snowflake stock, and I think investors should hold on to what they have (or consider buying more), as Snowflake’s brighter days are still ahead.

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Keithen Drury has positions in Snowflake. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway and Snowflake. The Motley Fool has a disclosure policy.

Warren Buffett’s Berkshire Hathaway is selling its snowflake stock. Don’t Follow. was originally published by The Motley Fool