Betting on Warren Buffett's Berkshire Hathaway investment company has been a winning strategy for decades. It has regularly outperformed the broader stock market, and it's actually sitting on a 5% gain in 2022 while the S&P 500 nurses a 15% loss.
But one of Berkshire's individual bets hasn't fared quite so well. The company owns $917 million worth of Snowflake (SNOW -1.61%) stock, a fast-growing provider of cloud and data services. It has declined by 54% year to date amid the tech sector sell-off.
This presents a unique opportunity for investors, though, because Snowflake has some incredibly high-profile partnerships with some of the largest technology companies in the world. Here's why Snowflake stock might be a buy now.
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Snowflake zigs while the tech sector zags
The technology sector has been a hiring machine over the last few years, as companies frantically tried to lock in the most-talented developers, engineers, and salespeople to keep the growth engine running. But as the economy slowed in 2022, so did the rate of hiring, and one estimate suggests more than 121,000 U.S. tech workers have been laid off this year. November alone accounted for 45,000 of them.
But that's not the case at Snowflake. It's still scooping up talent, hiring 556 new employees in the recent third quarter of fiscal 2023 (ended Oct. 31), which was actually an acceleration compared to the second quarter. The company has added 1,990 new jobs since this time last year.
It highlights Snowflake's optimism, and that should come as no surprise. The company is benefiting from the rapid growth in adoption of cloud-based platforms, which help businesses shift their operations, and their touchpoints with consumers, online. While that has streamlined workflows and brought costs down, the cloud does present some new challenges.
Large organizations often use multiple providers of cloud services to meet their needs. The three major players in that industry are Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud. It means that data is often siloed across different areas of the organization, making access tricky, which can cloud visibility (no pun intended).
Snowflake's Data Cloud can unify information across multiple sources, which is why the three aforementioned providers are willing to integrate with it: It benefits their customers in a big way when it comes to sharing important information with partners who might be using a different provider, or even to generate more-powerful insights internally.
Snowflake's revenue pipeline just topped $3 billion
Remaining performance obligations (RPOs) are the key measure by which companies like Snowflake track their financial performance. RPOs represent the company's outstanding pipeline of work, which is expected to convert into revenue at some point in the future.
Snowflake's RPOs jumped 66% year over year in the third quarter, topping $3 billion for the first time. The company is building momentum among its highest-spending customers. It had 287 of them contributing at least $1 million in annual revenue, nearly doubling compared to the same time last year.
But Snowflake's net revenue retention rate is what constantly attracts attention from investors. It came in at 165% during the quarter, and while that was down from 172% a year ago, it's still significantly higher than what most software companies would see. It essentially means each of Snowflake's existing customers are spending 65% more money with the company than in the prior year.
Snowflake is also one of very few companies raising revenue forecasts this year, while most of the tech sector is slashing guidance. It originally estimated it would generate up to $1.9 billion in full-year fiscal 2023 revenue, but now expects $1.924 billion as of the third quarter.
Snowflake's bottom line
One of the key reasons Snowflake stock has been crushed this year is its bottom-line results. As the economy has slowed, investors have favored profitable companies because they're perceived as more secure during uncertain times. Unfortunately, Snowflake had a net loss of $590 million during the first nine months of fiscal 2023.
But that was actually an improvement compared to the same period last year, because the loss represented just 40% of its total revenue of $1.47 billion, compared to 65% previously. Plus, Snowflake has a rock-solid balance sheet with over $3.9 billion in cash, equivalents, and short-term investments, affording it plenty of breathing space to sacrifice profits for the sake of growth.
Why would Snowflake want to sacrifice profits? Well, think back to its revenue retention rate. Every customer the company acquires will grow significantly more valuable over time, so it makes perfect sense to continue investing aggressively to bring them in.
That's why a long-term bet on Snowflake stock makes sense. Its business is firing on all cylinders with significant partnerships across the tech industry, yet its stock price is languishing with a 54% decline this year. Investors who buy the dip could see strong gains when broader stock market sentiment improves.
