3 Red Flags for Snowflake's Future

It's been a tough four years for Snowflake (NYSE:SNOW). The cloud-based data warehousing company went public at $120 per share on Sept. 16, 2020, more than doubled on its first trade to $245, and touched a record high of $401.89 on Nov. 16, 2021.

At the time, the bulls were impressed by its triple-digit percentage growth rates and investments in its IPO from Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) and Salesforce (NYSE:CRM). The buying frenzy in growth and meme stocks amplified its share price gains and caused many investors to overlook its soaring valuation.

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But as of this writing, Snowflake trades at about $127. It has nearly taken a round trip back to its IPO price as its growth cooled off and rising interest rates compressed its valuations. Snowflake's product revenue, which accounts for most of its top line, soared 106% in its fiscal 2022 (which ended in January 2022) and another 70% in fiscal 2023, but grew by just 38% in its fiscal 2024. Management expects that deceleration to continue with just 24% growth in fiscal 2025.

Snowflake mainly attributed the slowdown to macroeconomic headwinds, but its persistent losses and the abrupt retirement of its CEO Frank Slootman earlier this year prevented the bulls from coming back. I recently argued that investors might be getting too bearish on Snowflake -- but three red flags could hold its stock back for the foreseeable future.

1. Berkshire Hathaway has given up

Salesforce gradually sold all of its shares of Snowflake throughout 2021 and 2022, but during that period, Berkshire Hathaway held on to all 6.13 million of the shares it picked up in the IPO. That only accounted for about 0.2% of the conglomerate's massive investment portfolio, but the bulls believed that its faith in the company indicated that it was still a worthwhile long-term investment.

After all, Buffett rarely invests in tech stocks -- and previously, he only invested in blue chip tech companies like Apple, HP, IBM, and Oracle. That's why Berkshire's investment in Snowflake, a hypergrowth cloud stock without any GAAP (generally accepted accounting principles) profits, attracted so much attention.

But in the second quarter of 2024, Berkshire Hathaway liquidated its entire stake in Snowflake. It still likely reaped a profit since Snowflake's stock traded at an average price of $147.69 during the quarter, but that would have been a disappointing result.

That sale wasn't too surprising. Berkshire Hathaway has been selling a lot of stocks -- including half its stake in Apple and all of its HP shares -- to raise more cash over the past year. Buffett's conglomerate ended its latest quarter with a record $277 billion in cash and equivalents on its books -- so it might be keeping some powder dry for a potential market crash in the near future. However, this sale also eliminates one of the most compelling reasons to stick with Snowflake.

2. Ongoing security problems

Back in May, Snowflake disclosed a "potential compromise" of its data warehouses. The following month, it admitted it was facing a "targeted threat campaign against some Snowflake customer accounts" and enlisted CrowdStrike and Alphabet's Mandiant to investigate the attacks.

Last month, AT&T (NYSE:T) disclosed that hackers had gained access to "nearly all" of its wireless subscribers' calls and text messages during a six-month period in 2022 through Snowflake's data warehouses. Other affected customers include Live Nation's TicketMaster and LendingTree. It's likely that many other big customers were affected, since Snowflake was already serving 709 of the Global 2000 companies at the end of the first quarter of its fiscal 2025.

3. Competitors at the gates

If that crisis deepens, Snowflake could struggle to attract new customers. Its other big competitors -- most notably Amazon (NASDAQ:AMZN) Redshift, Microsoft Fabric, and Databricks -- could capitalize on that chaos and lure away some of its existing clients.

In the note accompanying their recent downgrade of Snowflake's stock from overweight to equal weight, Wells Fargo analysts warned that it could lose more customers if it didn't resolve its security issues. They also said Snowflake's recent management changes -- including the ascension of new CEO Sridhar Ramaswamy and the departure of Executive VP of Engineering Greg Czajkowski in July -- could exacerbate those problems. All of those challenges prompted the bank's analysts to reduce their price target on the stock from $200 to $130.

Should retail investors take the contrarian view?

Snowflake's stock has declined by 36% this year, but trading at a ratio of 12 times this year's sales, it doesn't look like a bargain. I gave it the benefit of the doubt as long as Berkshire Hathaway was still an investor, but the recent liquidation of that position suggests that its weaknesses could offset its strengths. Snowflake isn't headed off a cliff yet, but I think it's a bit too early to take the contrarian view.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has positions in AT&T, Amazon, Apple, and Berkshire Hathaway. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, CrowdStrike, HP, Oracle, Salesforce, and Snowflake. The Motley Fool recommends International Business Machines and Live Nation Entertainment and recommends the following options: short October 2024 $90 puts on Live Nation Entertainment. The Motley Fool has a disclosure policy.