Investing

Buffett's Billion Dollar AI Bet Is In Freefall

Austin Smith

Published: March 13, 2024 8:15 am

Warren Buffett doesn’t wade into the waters of technology stocks often. The Oracle of Omaha famously cautioned against them during the dot-com bubble. He almost nailed the peak exactly, issuing his warning to business elites in Sun Valley in July of 1999.

But, he’s bet big on one AI stock that’s been in a complete freefall lately, zigging while the rest of the market zags on AI enthusiasm. Let’s take a look. 

Buffett On Tech

More than a decade after Sun Valley Buffett shocked the world by making a $10 billion investment in IBM (NYSE: IBM). While that’s broadly considered to be a bad investment as shares languished, they’ve recently been on an AI fueled run and look set to reclaim the all time high of over $200 per share they set back in 2013. 

Then things got interesting. In 2016 Buffett initiated a $1.07 billion investment into Apple (NASDAQ:AAPL) A perfect storm of iPhone 6 sales, share repurchases, multiple expansion, and new products like AirPods combined with Buffett’s additional follow on investments have pushed that stake to $156 billion today. 

In addition to his Apple stake, Buffett’s Berkshire owns shares in Amazon (NADAQ: AMZN), and indirectly owns shares in Alphabet (NASDAQ: GOOG) through his subsidiary, New England Asset Management. 

So maybe Buffett is a tech investor now.

Warren’s Billion Dollar AI Bet

One of the most interesting positions in Berkshire’s portfolio is the nearly $1b stake in Snowflake (NASDAQ: SNOW). Snowflake is a cloud based data service provider that benefits from, and has leaned in to AI in a big way. The company recently acquired three AI companies Neeva, Streamlit, and Applica. And on the most recent earnings call AI was mentioned 27 times.

Buffett’s position dates back to 2020 and Snowflake’s IPO. Berkshire had assembled a position worth $730 million, only to see shares pop on the initial listing, good for an $800 million gain.

This was out of character. First, Buffett rarely if ever participates in new listings. Second, then CEO Frank Slootman ,while well regarded, isn’t a prototypical Buffett CEO. Snowflake was his third stint as CEO (different companies, all successful). A far cry from the quiet lifers Buffett typically backs. 

What’s Happening

The company has been getting hammered. Snowflake shares are down 30% in the last month, and remain down 35% since IPO. A swirl of bad news is hitting at once. Frank Slootman has announced his departure as CEO, revenue growth has slowed, and net revenue retention (a key metric for SAAS businesses) has declined for two years. 

Snowflake has fumbled the greatest tech tailwind since ZIRP. AI is single handedly driving the Nasdaq right now, and Nvidia’s (NASDAQ: NVDA) earnings have become a must watch event. And beyond missing the wave, the fundamentals are challenged. It’s still not profitable, yet trades at a steep price to sale multiple of over 20x, compared to only 9x for Meta (Nasdaq: META).

Will Buffett sell his stake in Snowflake after this recent volatility? I doubt it. Does that mean you should buy shares today? Probably not. 

There is simply too much up in the air right now. While Snowflake has made investments in AI, the strategy hasn’t really come out front and center on how to implement it. And after missing out on the early AI run, they may have to play catch up. With leadership in transition the best move is to wait and see what new CEO Sridhar Ramaswamy has in store before deciding whether to join Buffett on this AI rollercoaster.