When you think of a typical Warren Buffett stock, you might think of a company with a dull-but-steady business. Additionally, the stock likely has a low valuation, which appeals to Buffett's value investing style. However, one stock he owns doesn't fit any of these criteria.
Snowflake (SNOW 1.21%) stock makes up a mere 0.3% of Berkshire Hathaway's portfolio, but is unlike any other stock the holding company owns. Snowflake is a cloud computing company that Buffett and Berkshire were able to invest in before the stock's public debut. Trading around $153 a share these days, Snowflake has managed to gain about 27% from its initial public offering price of $120 -- where Buffett got in almost two years ago. But the stock started trading at $245 a share back in September 2020, so it definitely is trading down. Since then, the business has expanded significantly, making the valuation more reasonable thanks to the price drop.
With the average analyst projecting a $187.12 price target (22% upside), is Snowflake a stock you should have on your watchlist?
Snowflake helps its customers use data
Cloud computing is the key to the next iteration of business. By using external computing resources, companies that generate lots of data about their businesses and/or customers can scale their usage of storage or computational power without needing to purchase the expensive equipment itself.
A company's data comes in many different forms -- be it structured, semi-structured, or unstructured -- and can provide powerful insights when used correctly. Processing massive amounts of data efficiently can be difficult. And storing this vast amount of information can be cost-prohibitive if not organized well.
That's where Snowflake comes in.
Snowflake's tools allow software engineers to set up data warehouses to store information across multiple cloud providers. People can then utilize the data to feed artificial intelligence and machine learning models, among many other uses. If you've got data, Snowflake can store it, process it, and potentially deliver valuable insights.
The market opportunity for Snowflake's product is massive. By 2026, third-party analysis firm Gartner projects the market opportunity for Snowflake's four segments to be around $248 billion.
Compared to Snowflake's current revenue, this represents a vast growth opportunity.
Snowflake is growing quickly, but its unprofitable
During its fiscal year 2023 first quarter (ending April 30), Snowflake's product revenue rose 84% year over year to $394 million. Additionally, its remaining performance obligation (RPO) rose 82% to $2.6 billion. Both numbers are critical because they each tell a different story.
Because Snowflake operates on a pay-as-you-go model, product revenue displays how much customers currently use the product. Alternately, RPO lets investors know how well the company is selling its product, as Snowflake signs its users to deals that allow them to spend up to a certain amount. Having both metrics growing rapidly nearly in tandem is a good sign for the company.
Looking forward to the rest of the fiscal year, management expects product revenue growth of about 66%, to just under $1.9 billion. On its recent investor day, Snowflake even gave investors insight into what management believes revenue will look like on Jan. 31, 2030. By then, Snowflake expects to have $10 billion in annual product revenue while growing at a 30% annual clip.
2030 is still several years off, and meeting this forecast won't be easy. Snowflake will need to grow its revenue by 35% annually over the next eight years. Few companies have been able to grow at that rate reliably. In its favor is the fact that cloud computing and data analytics are just starting to ramp up and both are important needs of many companies these days.
Snowflake isn't yet profitable as a company and posted a loss of $189 million during Q1. While Snowflake could attempt to switch away from growth mode to profitability by reducing costs, it isn't in the company's (or investors') best interest to do so. It's in the early innings as a business, and losses are a part of that phase. With more than $3.7 billion in cash and short-term investments on its balance sheet, Snowflake has plenty of resources to keep operating at its current cash-burn state.
Snowflake's stock trades for a pricey 32 times sales. This valuation is reflective of how excited investors are about Snowflake's opportunity. However, it also presents a considerable risk, as any business slip-ups could tank the stock. Some of that has already been seen as the stock is trading down about 62% from its all-time high.
Even though Snowflake is loftily valued and unprofitable, the market opportunity here is too large to ignore. While the stock returns may take a while to manifest, The odds are good that Snowflake's stock will be higher in three to five years solely based on its revenue growth. So with Buffett alongside you, purchasing Snowflake stock today seems wise.
