Artificial intelligence (AI) is creating a lot of value for investors, but not every AI stock is worth buying right now.
Warren Buffett is one of the greatest investors of all time. he shouted Berkshire Hathaway Since taking over in 1965, the investment company's value has grown by 4,300,000 percent, crushing a 31,200 percent return. S&P 500 during the same period.
Berkshire manages a portfolio of publicly traded stocks and securities worth $370.9 billion, many of which have demonstrated steady growth, strong profitability, strong management teams, and shareholder-friendly features such as stock buybacks. and includes regular dividend payments. Buying companies with these characteristics is Buffett's recipe for long-term success.
However, Buffett is not the only manager at Berkshire with the freedom to buy stock. In 2020, the fund purchased shares of Snowflake (Snow -3.47%) prior to its initial public offering. The cloud computing company doesn't quite fit Buffett's usual criteria — while it's growing well, it's consistently losing money and it's not returning any cash to shareholders.
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Artificial intelligence is becoming an important part of Snowflake's business.
Snowflake's Data Cloud is a great tool for large, complex organizations that use multiple providers of cloud services. This allows them to break down silos by pooling their data in one place, where valuable insights can be extracted more effectively.
Since data is the lifeblood of artificial intelligence (AI), Snowflake's focus on data management makes it the perfect candidate to develop products in this emerging industry. The company last year introduced Cortex AI, a new platform that helps businesses achieve their AI goals. Users using Snowflake Cortex can rapidly build AI chatbots using a combination of their own data and ready-made, open-source Large Language Models (LLMs) such as Llama.
Cortex also comes with several new AI tools developed by Snowflake. Copilot is an AI-powered virtual assistant designed to speed up workflow on the Snowflake platform, and Document AI allows companies to quickly extract data from unstructured sources like contracts and invoices. Then there's Universal Search, which enables all employees — even those in non-technical roles — to find the data they need using natural language in their search queries.
Cortex was only publicly released in May, and 750 of Snowflake's 9,822 users have already adopted it.
But AI isn't everything.
Buffett rarely invests in technology stocks himself, preferring to stick with businesses within his wheelhouse. Therefore, it is likely that one of his lieutenants bought Snowflake back in 2020, especially considering the financial characteristics of the company.
Snowflake generated $789.6 million in product revenue during the most recent fiscal 2025 first quarter (ended April 30), a 34% year-over-year increase. That's a strong growth rate, but it marked a decline from the year-ago quarter when revenue grew 50 percent. If Snowflake was cutting costs (such as marketing) to manage its profits, the slower revenue growth would be easily explained because the company would be creating fewer business opportunities. But that doesn't seem to be happening.
During Q1, the company spent 31% more on operating expenses than in the year-ago period, including a 48% increase in research and development costs. This resulted in a net loss of $316.9 million, a 40 percent increase from the first quarter last year.
The rapid increase in Snowflake's research and development spending makes sense given the speed with which the company is developing its Cortex AI platform. However, the combination of declining revenue, rising costs, and mounting losses could be a recipe for a stagnant stock price.
Snowflake stock remains expensive.
Snowflake stock is trading above its IPO price of $120, so Berkshire is sitting on a small profit. But the stock is 60 percent below its all-time high of $392, set for late 2021, so it's been falling steadily for nearly three years.
But the story goes wrong. Based on Snowflake's trailing 12-month revenue of $3 billion and its market capitalization of $51.6 billion, the stock trades at a price-to-sales (P/S) ratio of 17.2. It is also more expensive than the 13.5 P/S ratio. Microsoftwhich is the world's largest company and leader in cloud computing and AI software.
Snowflake is forecasting $3.4 billion in product revenue for the full fiscal year 2025, which unfortunately would represent only 24% year-over-year growth, indicating that growth still has legs to go. On this basis it is very difficult to justify paying a premium P/S ratio for this stock right now.
Snowflake will likely benefit greatly from the AI ​​revolution, but Berkshire may be happy that its $947 million holding in the stock is only 0.3 percent of its total portfolio. If the company can't find a way to accelerate its top-line growth, there's a strong possibility that its stock will continue to decline from here based on its rich P/S ratio.
Therefore, investors may do better to avoid Snowflake stock until it either rises significantly or becomes significantly cheaper.
Anthony DiPizio has no position in any stocks. The Motley Fool has positions in and recommends Berkshire Hathaway, Microsoft, and Snowflake. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a Disclosure Policy.