In many ways, 2022 has been a year like no other, marked by financial headwinds and the worst bear market in more than 10 years. These factors have sent many investors running for cover, foregoing stocks with high valuations and seeking shelter from the economic storm. This has been compounded by 40-year-high inflation, relentlessly rising interest rates, and fears regarding the potential for these conditions to persist far into 2023.
Investors with the ability to view the glass half full, however, recognize the opportunity to prosper in times like these. Downturns have historically affected both good stocks and bad, and this one is no different. As a result, investors have a once-in-a-decade opportunity to buy shares of top stocks at knocked-down prices. Perhaps one of the best examples of this is Snowflake (SNOW 2.74%). The cloud data platform has seen its stock price decline 62%, despite continuing strong growth and a bright future.
Can Snowflake persevere against the economic headwinds that have buffeted the stock this year? Let's dig into the facts to see what we can uncover.
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A special little Snowflake
More than ever before, businesses live and die by their ability to harvest the massive amounts of information generated every day. Data helps companies predict trends, understand and respond to consumer behavior, and arm leaders with the facts needed to make important decisions.
Unfortunately, this information is often spread across a variety of locations, disparate systems, and even cloud services, making it difficult to extract meaningful and actionable data. That's where Snowflake comes in. the company's state-of-the-art software-as-a-service (SaaS) system not only stores data but helps businesses share and analyze data across systems and even competing cloud platforms. Unlike the competition, Snowflake doesn't impose a subscription fee but rather charges businesses based on how much data they have stored -- and this transparent pricing wins rave reviews from customers.
The numbers don't lie
In the face of the economic downturn, businesses have been tightening their belts, looking for ways to cut spending and shore up their war chests in the event of a deep or prolonged recession. Given this environment, you'd be forgiven for believing that Snowflake's data services would suffer -- but the results paint a very different picture.
In its fiscal 2023 third quarter (ended Oct. 31), Snowflake's revenue of $557 million grew an incredible 67% year over year, while its underlying product revenue also grew 67%. As a result, the company delivered adjusted earnings per share of $0.12, which surged 200%.
Other metrics were equally robust. Snowflake's remaining performance obligation (RPO) -- a leading indicator of a company's future potential -- climbed to $3 billion, up 66% year over year. At the same time, its customer base of 7,292 grew 34%. Perhaps more importantly, high-end customers spending $1 million in trailing-12-month revenue soared 94%. Furthermore, existing customers continue to spend more, as shown by its net revenue retention rate of 165%. This all suggests that even a year into the downturn, businesses understand the value they get from Snowflake's services and aren't making changes.
High-profile backers
At the time of Snowflake's debut in late 2020, it marked the biggest software initial public offering (IPO) ever, boasting some well-known and high-profile backers. Berkshire Hathaway and Salesforce each agreed to purchase $250 million of Snowflake stock at the offering price in a private placement. Furthermore, Berkshire Hathaway also picked up more than 4 million shares from an existing stockholder, bringing the company's total investment to more than 6 million shares, recently worth more than $800 million.
It's worth noting that it wasn't Warren Buffett that made the decision to invest in Snowflake stock, but rather one of Buffett's longtime investing managers, Todd Combs or Ted Weschler. Earlier this year, Buffett noted that Combs and Weschler had "total authority in respect to $34 billion of investments" at Berkshire Hathaway, so he obviously values their stock-picking acumen.
A long growth runway ahead
The world continues to generate data at a frantic pace, which suggests the need for Snowflake's services will only grow from here. It's estimated that the cloud data storage market will be worth $83 billion this year, rising to $376 billion by 2029, according to Fortune Business Insights. This helps illustrate the secular tailwinds that will fuel Snowflake's rise.
That's not all. The company generated revenue of more than $1.2 billion in revenue last year, but that pales in comparison to Snowflake's total addressable market, which management recently estimated at $248 billion.
It's worth noting that all this opportunity comes at a price, and Snowflake isn't for the faint of heart. Even after its stunning decline over the past year, the stock is still not cheap in terms of traditional valuation metrics. Snowflake currently trades for 14 times next year's sales when a reasonable price-to-sales ratio is between 1 and 2. However, investors have historically awarded a premium valuation to companies with strong historical growth and the potential for even more -- a bar that Snowflake clears with ease.
Given its robust growth, strong secular tailwinds, and massive opportunity, Snowflake is one stock investors should be buying hand over fist.
