Warren Buffett's Berkshire Hathaway: Shifting Focus from Apple to AI

Prediction: After Offloading Apple, This Will Be the Next Move Warren Buffett Makes With Artificial Intelligence (AI) Stocks | The Motley Fool

One the biggest storylines in the capital markets right now revolves around Apple. More specifically, Warren Buffett's Berkshire Hathaway sold off a significant portion of its stake in the iPhone maker according to recent filings. While this has raised many eyebrows in the investment community, I personally wasn't surprised. Moreover, I think Buffett is far from finished. Let's dig into Buffett's recent portfolio management and explore what the Oracle of Omaha might just do next. Per Berkshire's most recent quarterly report, the company's stake in Apple was worth $84.2 billion as of the end of the second quarter. By comparison, Buffett's Apple stake was worth about $135 billion at the end of the first quarter. While Apple remains a prominent pillar of Berkshire's portfolio, it's interesting to see Buffett reduce his stake by such a significant amount. With that said, there were some indications that this was coming. Earlier this year Berkshire trimmed its Apple position by about 13%. Buffett explained his rationale for that move during Berkshire's annual shareholder meeting -- citing that he believed changes to the tax code were on the horizon. Essentially, Buffett was looking to lock in some gains and avoid a higher tax liability should his prediction come to fruition. While it's impossible to predict the perfect moment to sell a stock, Buffett's logic makes total sense. Now that it's been revealed that he's reduced his Apple stake even further, I think there's a good possibility the famed investor will make another move that will also revolve around savvy tax planning. Buffett's portfolio is filled with blue chip, steady growth businesses such as Coca-Cola and American Express. Berkshire rarely invests in high-growth opportunities outside of its core industry positions. However, a few years ago Berkshire made one of its most intriguing moves in recent history. In 2020, Berkshire invested approximately $730 million in the Snowflake (SNOW 2.31%) initial public offering (IPO). Snowflake is a software-as-a-service (SaaS) business specializing in big data analytics. Not only does Snowflake operate in the tech sector, which Buffett generally ignores, but at the time of the IPO the company was still burning cash. One of Buffett's core investment philosophies is to invest in companies that generate steady and growing cash flow. According to filings, Berkshire owns about 6.1 million shares of Snowflake. Given its total investment of $730 million, investors can assume that Berkshire's cost basis in Snowflake stock is around $120. Per the chart above, it's clear that Buffett missed out on some significant gains in Snowflake stock a couple of years ago. Moreover, with the stock trading around $116 per share today, Berkshire is now sitting on a loss in its position. If the chart above is any indication, Snowflake's price action is pretty volatile. Although there's a chance the stock could rebound significantly, the trends above indicate that investors have been engaging in some heavy selling of Snowflake stock for a while now -- particularly throughout 2024. While Buffett's loss in his Snowflake position isn't that big in the grand scheme of things, I still think there is a good chance he will exit the position. I can't say for certain why Buffett sold more Apple stock. My suspicion is that he is looking to stockpile more cash due to a variety of factors, including uncertainty in the market as it pertains to the upcoming presidential election, further hedging as it relates to potential changes to the tax code, and reducing his exposure to an ever-changing artificial intelligence (AI) narrative. All of these concerns could very well impact stocks like Snowflake, too. Keep in mind that earlier this year Snowflake's CEO suddenly departed, leaving investors stunned. Furthermore, unlike many of its SaaS peers, Snowflake has made little progress in AI. These dynamics have left many investors unenthused and doubtful about the company's future -- hence the ongoing selling activity throughout this year. Given Buffett has already made some splashy changes to his portfolio for tax reasons, I think it could make sense that he sells his Snowflake stock and reduces his capital gains tax through a strategy known as tax loss harvesting. Moreover, I question if Buffett has fully bought into the AI narrative considering he isn't known to be much of a technology investor. My hunch is that he isn't and that it probably makes some sense to get out of Snowflake and turn back to his roots.

1 Warren Buffett Stock That Could Go Parabolic in 2024 and Beyond | The Motley Fool

Snowflake has taken a round trip back to its IPO price -- but it could bounce back. When Snowflake (SNOW 2.31%) went public in September 2020, the cloud-based data warehousing company gained a lot of attention for two main reasons. First, it was growing like a weed. Second, Warren Buffett's Berkshire Hathaway -- which rarely invests in hypergrowth tech stocks -- acquired 6.13 million shares during its IPO. It still holds that entire position, which accounts for 0.2% of its portfolio, as of this writing. Berkshire's decision to stick with Snowflake is interesting because it now trades below its IPO price of $120. It more than doubled on its first trade to $245. It soared to an all-time high of $401.89 on Nov. 16, 2021, but now trades at $115. Therefore, the value of Berkshire's Snowflake stake grew from $736 million to $2.46 billion before shrinking back to about $705 million. Like many other hypergrowth tech stocks, Snowflake lost its luster as its revenue growth cooled off and rising interest rates compressed its valuations. However, I believe Snowflake might go parabolic in 2024 and beyond as its growth rates stabilize. Large organizations often store all their data across a broad range of computing platforms, on-site software, and cloud-based services. That fragmentation across different silos makes it difficult to make data-driven decisions. Snowflake's cloud-based data warehouses pull all that data into a centralized location, clean it up, and make it much easier for third-party data mining, analytics, and artificial intelligence (AI) apps to access that information. Cloud infrastructure giants like Amazon Web Services (AWS) and Microsoft Azure offer their own integrated cloud warehouses, but they lock customers into their broader ecosystems. Meanwhile, Snowflake's cloud warehouse is compatible with AWS, Azure, and other cloud platforms -- which makes it an ideal choice for companies with multi-cloud configurations. It also charges flexible usage-based fees instead of locking its customers into sticky subscriptions. There's clearly a lot of demand for Snowflake's services. Its revenue soared 124% in fiscal 2021, and jumped 106% in fiscal 2022 (which ended in January 2022) as its net revenue retention rate rose from 168% to 178%. Those dizzying growth rates attracted a stampede of bulls, and the buying frenzy in hypergrowth and meme stocks in late 2021 amplified those gains. In June 2022, Snowflake's then-CEO Frank Slootman claimed the company's product revenue (which accounted for most of its top line) would hit $10 billion in fiscal 2029. To achieve that ambitious goal, Snowflake would have needed to grow its product revenue at a compound annual growth rate (CAGR) of 36% from fiscal 2022 to fiscal 2029. But here's what actually happened. Data source: Snowflake. *Analysts' estimates (Yahoo! Finance). Like many other cloud-based software companies, Snowflake's growth cooled off and its retention rates slipped as the macro headwinds drove many of its customers to rein in their spending. Stiff competition from AWS' Redshift, Azure's Synapse, and similar start-ups like Databricks could be exacerbating that pressure and limiting its pricing power. To reach $10 billion in product revenue, Snowflake would need to grow at a CAGR of 30% from fiscal 2024 to fiscal 2029. Snowflake hasn't officially withdrawn that long-term goal yet, but Slootman's unexpected retirement earlier this year raises a few red flags. Analysts expect its revenue to grow at a CAGR of 24% from fiscal 2024 to fiscal 2027. Snowflake's revenue growth is cooling off, but its adjusted product gross, adjusted operating, and adjusted free-cash-flow (FCF) margins are all fairly stable. Data source: Snowflake. The company also turned profitable on a non-gaap (adjusted) basis in fiscal 2022 with an earnings per share (EPS) of $0.01. That figure rose to $0.25 in fiscal 2023 and $0.98 in fiscal 2024. Analysts expect its non-GAAP EPS to decline 36% in fiscal 2025 as its growth slows down, but rise 57% in fiscal 2026 as the macro environment gradually improves. Snowflake's near-term outlook seems murky, but its stock now trades at just 9 times next year's sales. In comparison, it traded at 59 times its fiscal 2023 sales when it hit its record high in November 2021. Yet the company is still poised to profit from the secular expansion of the AI market as companies pour more data into analytics and AI apps. I previously said I wouldn't touch Snowflake's stock until it revisited its IPO price, but it's now trading below that level. Just as investors were too bullish in 2021, they're now too bearish -- and Snowflake could easily surprise the market over the next year as its growth rates and retention rates stabilize again. Therefore, it could be a great stock to buy before interest rates decline and investors pivot toward higher-growth tech plays again. That's probably why Berkshire Hathaway still hasn't sold the stock.