Image Source: Pexels
AI stock Snowflake (NYSE: SNOW) discovered that beating earnings estimates does not always move the needle; in fact, the stock was down about 13% after a second quarter earnings beat.Snowflake generated $869 million in revenue in the second quarter, a 29% increase over the same quarter a year ago. Analysts had predicted $852 million in revenue.The company had a $318 million net loss in the quarter, which was worse than the $227 million net loss in Q2 of 2023. On a non-GAAP adjusted basis, it managed $63.8 million in net income, or 19 cents per share, down 12% year-over-year. Analysts had estimated 16 cents per share in adjusted earnings.So, what factors caused the stock to plummet 13% since earnings were released on Wednesday?
Warren Buffett dumps Snowflake stock
Snowflake provides its customers with a cloud data warehouse, where they can store their data on a single platform, minus the silos. It has the ability to automatically scale up or down its capacity, depending on the data that needs to be stored or analyzed, and can handle complex AI-related data functions and tasks.It was an impressive enough business to catch Warren Buffett’s eye, as the chairman and CEO of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) invested in the stock when it went public in 2020. This was rare for Buffett for a few reasons.One, Buffett had never invested in an initial public offering (IPO) before. Two, it is a technology company, and Buffett himself said he doesn’t often invest in tech stocks because it is not an industry that he understands that well. Three, it had a relatively small market cap, in the midcap range, when he first invested in it.Why he made an exception for Snowflake is even less clear now, as the company has struggled to generate profit.Snowflake stock is down 13% since Q2 earnings came out Wednesday, and is down 32% year-to-date. Since it went public, Snowflake has an average annualized return of -17%.Just last week, it was learned that Buffett completely sold out of Snowflake stock, after gradually reducing his position in recent quarters. It was a rare whiff for the Oracle of Omaha, who decided to cut his losses after just four years.
Why Snowflake stock is down
The Buffett decision to dump the stock, revealed in an Aug. 15 SEC filing, may be part of the reason why the stock was falling this week.But there could be other factors as well. While Snowflake beat earnings estimates, the bar was pretty low, as the company posted a net loss that was 40% worse than it was in the same quarter a year ago. Even the adjusted earnings were 24% lower than a year ago. Investors may just be tired of lack of profitability and earnings heading in the wrong direction.It has also been dealing with negative press from a cyberattack back in May that led to a breach of some its corporate clients’ data.Snowflake CEO Sridhar Ramaswamy told CNBC this week that the breach has not affected its core business with its clients or prospects and called the platform “incredibly strong and secure.” Still, it may have scared off some investors.Also, Snowflake received a slew of price target downgrades after posting Q2 earnings. While the company expects revenue to increase 22% in Q3 and 26% for the full fiscal year, costs remain a concern.Snowflake guided for a 3% operating income margin for Q3 and the full fiscal year, which would be down from a 5% margin in Q2, suggesting that the company is continuing to struggle with expense management.While Snowflake could have some long term upside, it is hard to recommend a buy right now until there is some momentum toward profitability.More By This Author:Target’s Price Cuts Pay Off With Big Beat, Stock Soars 16%
3 Stocks That Could Benefit From Interest Rate Cuts
3 Mistakes To Avoid During A Market Sell-Off And What To Do Instead
