Brad Gerstner's Altimeter Capital has been a longtime backer of Snowflake but recently reduced its holding.
Have you ever looked forward to going to a concert by your favorite artist only to be left unimpressed by the live performance? Or watched your college star fail to perform at the pro level?
That experience can also be applied to investing.
Startups can attract an incredible amount of attention while they're private. They often attract big-name venture capital (VC) investors and well-known brands as customers. Naturally, investors are excited about the opportunity to invest in these companies during their initial public offerings (IPOs).
It's hard to think of a company in recent memory that has had such a high-profile IPO. Snowflake (snow -3.38%)It was the largest software IPO in history.
However, since its public listing in late 2020, the stock price has recovered. Negative 45%. These are stories of expectations not being met.
Is now an opportunity to buy on the Snowflake dip, or is a new blizzard unfolding before our eyes?
Altimeter Capital reduces Snowflake stake
One of Snowflake's longest-standing investors is Altimeter Capital, the hedge fund led by Brad Gerstner.
Altimeter invested in Snowflake when it was still private and built up a sizable position in the years leading up to the IPO, suggesting that Gerstner is a staunch supporter of Snowflake, although his most recent 13F filings indicate that his stake in the company has declined by 17%.
During the first quarter, Altimeter sold 2.1 million shares of Snowflake stock. Additionally, filings show that Altimeter redeployed some of this capital into semiconductor, IT infrastructure, and e-commerce opportunities.
It's worth noting that even though Altimeter has significantly reduced its stake in Snowflake, the software company still remains the fund's largest position, but I'm not going to be deterred by that.
Keep in mind that Gerstner invested in Snowflake almost a decade ago, and while the stock has fallen since the IPO, Altimeter is arguably still reaping big gains.
Image source: Getty Images.
Is Snowflake an opportunity for AI?
Over the past 18 months, Artificial Intelligence (AI) has rapidly emerged as the next big thing in technology. Microsoft, alphabet, Amazonand NVIDIA It's garnering attention from AI enthusiasts across Wall Street.
But AI isn't just for big tech companies. Palantir Technologies, Service Now, Datadogand MongoDB is a leading developer of AI software as a service (SaaS). It's odd to see Snowflake not on any list of AI startups.
The reality is, 2024 was going to be a tough year for Snowflake. Earlier this year, the company shocked investors with the sudden resignation of CEO Frank Slootman. After his departure, more investors began to question Snowflake's future.
Recently, the company tried to grab attention by releasing a large-scale language model (LLM) called Arctic, a move I saw as pure fakery.
The AI field is already full of LLMs like ChatGPT, Gemini, Llama, Claude, etc. All of these generative AI models are built by large tech companies with bigger pockets and more influence than Snowflake.
Snowflake has yet to demonstrate its ability to compete at a high level in the AI space, and furthermore, I suspect that Gerstner has identified a more attractive opportunity and chosen to part with his interest in Snowflake and pursue it instead.
Is now a good time to invest in Snowflake?
We acknowledge that the financial results depicted in the chart below do not necessarily spell out dire results: Snowflake's revenues are growing at a healthy clip, and the company's profit margin profile remains healthy.
Free cash flow remains quite volatile, likely due to the challenging macroeconomic conditions characterized by unusually high inflation and rising borrowing costs, both of which have a significant impact on corporate budgets.
SNOW Revenue (Quarterly) Data by YCharts
When it comes to investing in Snowflake, you need to look at the long-term outlook rather than past performance. And here's the problem: The change in management and what appears to be a slow start to the AI marathon make the picture look puzzling at best.
Moreover, despite the sharp decline in its stock price, Snowflake still trades at 15x sales. S&P 500 It's only 2.5.
It will be interesting to see if Gerstner continues to reduce his Snowflake holding over the next few quarters. For now, I would stay on the sidelines with Snowflake. The valuation seems out of touch with market fundamentals and the lack of clarity on the AI strategy is creating an unwanted level of uncertainty for growth investors.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Spatacco has invested in and recommends Alphabet, Amazon, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool has invested in and recommends Alphabet, Amazon, Datadog, Microsoft, MongoDB, Nvidia, Palantir Technologies, ServiceNow, and Snowflake. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
