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This Warren Buffett Stock Crushed Q2 Earnings

By Trevor Jennewine – Updated Sep 12, 2021 at 10:07PM

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Amid a blizzard of data, Snowflake continues to post red-hot growth metrics.

Snowflake (SNOW 4.64%) pioneered the data cloud, a platform that helps clients manage and make sense of big data. Of course, data is knowledge and knowledge is power, but that's only true if you have the tools to harness data and unlock its value. And that's become increasingly difficult as enterprises are generating data at a phenomenal pace. So Snowflake attempts to solve a critical problem.

In a somewhat surprising move, Warren Buffett's Berkshire Hathaway invested $735 million in this high-growth tech stock around the time of its initial public offering last September. Since then, Buffett has seen big gains, and his position in Snowflake is now worth $1.5 billion.

In this Backstage Pass video, which aired on Aug. 26, 2021, Motley Fool contributors Trevor Jennewine and Brian Withers discuss Snowflake's second-quarter earnings. Spoiler alert: The company crushed it.

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Trevor Jennewine: The gist of Snowflake's business, enterprises are creating a lot of data today and it's spread across a lot of different systems. The idea behind snowflake is to bring all of that data together so that you can use it to make an informed business decisions, essentially. To solve the problem of data sprawl, they've created the data cloud, and this combines a lot of old legacy tools or point solutions like pipelines and data lakes, data warehouses.

The idea is that you can pull that data together, analyze it, build data-driven applications, or even share it, and I'm going to come back to this sharing point, I think that's particularly important. But I wanted to share my screen real quick so we'll see how that goes.

Brian Withers: It looks like you have lots of screens.

Trevor Jennewine: I do. [laughs]

Brian Withers: You got to be a tech guy. There we are. Awesome.

Trevor Jennewine: This is a few slides from their investor presentation. Let me change, now this is the single page.

Brian Withers: Looks good.

Trevor Jennewine: Starting with the revenue growth, the revenue for the quarter came at $272 million, and that is up 104% over the prior year, so the company is growing very quickly. Then looking at these numbers, the vast majority of that is product revenue. The company does have a little bit of very little margin service revenue, and that continues to be phased out as product revenue is growing. This growth rate is a little bit slower than what they posted for the full year 2021. This Snowflake is in fiscal year 2022 now. This is the second quarter. But still very fast growth, I think, is the takeaway here.

Brian Withers: Can you enlarge it just a bit?

Trevor Jennewine: Yeah. Is that any better?

Brian Withers: Much better.

Trevor Jennewine: Sorry about that. This next slide shows the breakdown internationally. The company is mostly concentrated in the Americas right now, but they are gaining traction in Europe. I wanted to point that out. There's a lot of opportunity for them to expand internationally and that's something that management has talked about.

Then this shows the remaining performance obligation. This is revenue that is contractually obligated, but they haven't necessarily build their customers for it yet or they don't have it on the books yet. This figure actually had $1.5 billion. I think if you're paying attention to Snowflake, you need to look at remaining performance obligation alongside revenue because the company uses a consumption-based business model. Management's always pressing this point. I think one thing you want to look at here with $1.5 billion, the growth from the previous year where they were at $688 million, this actually grew 122%. Their remaining performance obligation is actually growing faster than their top line is right now. In other way to say that is the money that they're going to be making in the future, it is getting bigger, faster than the money they're making right now. I think that speaks to the company's future growth opportunities.

Moving down the rest of the income statement, the company did post the net loss is $0.64 per share. That is smaller than the $1.31 per share net loss they posted last year, but they are still not profitable on a GAAP basis. Also, not generating positive free cash flow. They posted a net loss of $12 million in free cash flow during the most recent quarter. Those are, I guess, some of the downsides there. This slide is busy, but there's a few things that I wanted to draw your attention to. First, Snowflake has almost 5,000 customers, now they have 4,990 customers. That's up 60% over the prior year, so they're growing their customer base quickly. They're actually gaining traction with a lot of larger customers. They have 212 Fortune 500 customers now. That's up over 30% from the previous year. They have 116 customers that are having contract value or they're paid more than a million dollars over the last 12 months. They're gaining traction with these larger customers and they're growing their customer base. Then the last big thing here is that their net revenue retention rate actually went up to 169 %, which is just incredible. If you're a software company and you have 120% retention rate, that would indicate that the average customer spent 20% more over the past year than they did in the year before that, 120% is strong, 169% I think is incredible. Like I said, that number is actually trending upwards. In the second quarter of last year, that was 158%. We saw it go up to 169% today. In terms of what's going on in Snowflake in the market, the stock is very pricey. I think the question here is how long can they maintain this customer growth? How long can they maintain their topline growth? Will it be long enough to justify the valuation?

They did actually raise their guidance for the full year. They're estimating, at the midpoint, 92% product revenue growth. Last quarter, they were calling for 86% at the midpoint. This is a little bit higher. The management has actually provided some guidance much further out. They're expecting product revenue to hit $10 billion by fiscal 2029. We're in 2022 right now, and when they made that forecast, product revenue was just over $550 million. The growth rate that they are calling for over the next eight or so years is about 45% revenue growth, which is much slower than they're growing now. But to be able to look out into the future and say, "Hey, we're going to grow 45% per year over the next eight years," that shows a lot of confidence in the business and I like that enthusiasm.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Snowflake Inc. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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