Warren Buffett and his team at Berkshire-Hathaway (NYSE: BRK.A) (NYSE: BRK.B) are among the best investors of all time. They are known for their value investing philosophy, which is why it may have surprised some people when they took a position in a high-flying growth company like Snowflake (NYSE: SNOW) when it debuted on the public markets in late 2020.

However, as of June 30, Berkshire no longer owns any Snowflake shares, having sold them in the second quarter. I think Berkshire exited its position in Snowflake at perhaps the worst possible time. But it may have been a good move for Buffett & Co.

Snowflake was not an average investment for Berkshire

Warren Buffett is not the only investor with influence at Berkshire Hathaway. Todd Combs and Ted Weschler also make decisions, and they are known to be more growth-oriented than Buffett, although value investing is at the heart of their work. This leads to an important caveat in the value investing philosophy: even growth companies can be considered value stocks if the right conditions exist. Take Applefor example. When Berkshire first bought Apple shares, they were still growing but also dirt cheap.

But it seems the crew at Berkshire has lost faith in Snowflake. Berkshire bought Snowflake shares at a pre-IPO price of $120 per share, which was a fantastic deal since the stock was trading at around $245 that day. Although Snowflake shares traded for an average of $148 during the second quarter, there were two ranges: before and after the first-quarter earnings release on May 22. If Berkshire sold before the results, it probably earned around $155 per share; if it sold after, the price was probably around $125.

So what is the reason for the big price difference?

About a month after Snowflake closed its 2024 fiscal year (which ended January 31), longtime CEO Frank Slootman retired. Sridhar Ramaswamy, who Leading Snowflake’s AI strategyreplaced him, and his first quarter did not go well. The stock fell 5% the day after the May 22 quarterly report and is now down about 20% from the close immediately before the report.

Snowflake’s growth is slowing and the company is still far from profitability. Additionally, there was a data breach that caused many investors to lose confidence.

Given the unclear prospects for profitability, Berkshire may have decided it had had enough and got out while it still had enough invested. But I think that was a premature move.

Snowflake still has a massive catalyst that has yet to be realized

Snowflake provides its customers with software to manage data in a cloud environment. This product has been widely used and gained traction in recent years. As artificial intelligence (AI) gains momentum, the company could become even bigger. If every company wants to have its own AI model tailored to its business, it will need a lot of data to train it. Snowflake is directly benefiting from this, but this increase in demand may still be a year or two away.

Berkshire is not the only group that has lost confidence in Snowflake; many others have already pulled back, driving the stock price down. As a result, Snowflake’s valuation from a price-to-sales (P/S) perspective is at an all-time low.

At a price-to-earnings ratio of 14, you could almost consider Snowflake stock a value bet again (I’m only half kidding!). While 14 times sales is still very expensive for most companies, the potential for Snowflake is high due to its software business.

It’s not uncommon for companies like Snowflake to have profit margins in the 20-30% range, but Snowflake is currently far from that, posting a negative profit margin of 38% in Q1. This is because Snowflake is investing heavily in growth due to the tremendous opportunities it faces.

Analysts predict tremendous growth for Snowflake and expect revenue of around $5.3 billion for the 2027 fiscal year (ending in January 2027).

A lot can happen in the next two and a half years. If Snowflake hits those revenue targets and achieves a 20% profit margin, the company would generate earnings of about $1.06 billion. Today’s valuation would value the stock at 40 times those earnings, which is pretty average for a mature software stock.

There are a lot of “ifs” in these predictions, but investors shouldn’t slam the door in Snowflake’s face just yet. Now may be the worst possible time to sell Snowflake shares, and I think investors should hold on to what they have (or consider buying more), because Snowflake’s better days are still ahead of the company.

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Keithen Drury has a position in Snowflake. The Motley Fool has a position in and recommends Apple, Berkshire Hathaway, and Snowflake. The Motley Fool has a disclosure policy.

Warren Buffett’s Berkshire Hathaway Sells Its Snowflake Shares. Don’t Follow. was originally published by The Motley Fool