Any conversation about the greatest investors of all time would no doubt include renowned Berkshire Hathaway CEO Warren Buffett. The "Oracle of Omaha" has been in the driver's seat at the company for more than five decades and in that time has become the yardstick by which all long-term investors are measured. Since he took the helm at Berkshire in 1965, its stock has risen more than 20% annually (on average). In total, it surged a mind-boggling 3,641,613%.
Given the challenges investors faced over the past year, many are looking for any advantage they can find to improve their odds of success. Many are scouring Berkshire's extensive list of holdings searching for diamonds in the rough. One stock that appears especially intriguing is Snowflake (SNOW +0.26%). In the bear market the share price has fallen 59% from its peak -- belying the business's impressive financial results.
Will Snowflake rebound from the economic headwinds that have "buffeted" its stock in 2022? Let's take a look and see what the big picture reveals.
Image source: Getty Images.
Riding two powerful secular trends
To appreciate Snowflake's potential, it's important to understand the company's position in two critically important secular tailwinds.
Snowflake's ability to store and manage data is unrivaled, with its growth fueled by the ongoing digital transformation. Businesses are unloading data to the cloud more than ever before, gaining the ability to scale, increase organizational flexibility, and streamline operations -- all in a cost-effective way.
Then there's business and data analytics. Companies grow and prosper by the insights they derive from analyzing data -- including everything from production efficiencies to customer demographics. Cloud computing ushered in a new set of challenges. With data scattered about the ether, residing on a growing number of systems, locations, and even cloud providers, the ability to gather and analyze siloed data and draw actionable conclusions has been severely compromised.
Snowflake addresses the issue by forging partnerships with all the prominent cloud providers -- including Amazon Web Services (AWS), Microsoft Azure, and Alphabet's Google Cloud, among others. This allows its state-of-the-art software-as-a-service (SaaS) system to aggregate data from a vast array of third-party applications and cloud infrastructure platforms to a single dashboard.
Unlike other providers that charge fixed subscription fees, Snowflake charges its customers based on how much data they have stored, allowing clients to scale their use as they grow. The transparency of its pricing is a big hit with customers.
The proof is in the pudding
For its fiscal 2023 third quarter (ended Oct. 31), Snowflake's revenue grew an impressive 67% year over year to $557 million, fueled by product revenue that also grew 67%. As a result, the company generated adjusted earnings per share of $0.11, up 267%. Furthermore, Snowflake's remaining performance obligation -- which provides insight into future revenue trends -- climbed 66% to $3 billion. This suggests that growth could continue, though of course the economy is a wild card.
Customer metrics were equally compelling. The overall customer count rose 34% year over year to 7,292, while the number of those spending $1 million or more over the trailing 12 months period grew 94%. This shows that Snowflake's most valuable customers are outpacing the others. And the company's net revenue retention rate of 165% reveals that existing customers are spending 65% more than they did last year, owing to the value they get from its offerings.
The evidence suggests that Snowflake could continue to grow at a high rate far into the future -- even if the current macroeconomic headwinds temporarily stunt its growth.
Over the longer term, Snowflake's opportunity is massive. Management pegs the total addressable market (TAM) at roughly $248 billion. In light of its projected 2022 revenue of $2 billion, the magnitude of the opportunity that remains is massive.
NYSE: SNOW
Key Data Points
The 800-pound gorilla in the room
Some investors might balk at defining Snowflake as a bargain-basement stock, particularly if they view the company through the lens of traditional valuation metrics.
Indeed, Snowflake currently sells for 16 times next year's sales, which some investors would deem frothy, especially since most experts agree that a reasonable price-to-sales ratio is between 1 and 2. That's a perfectly reasonable conclusion -- if not for the company's history of robust growth.
During the first nine months of 2022, Snowflake's revenue reached $1.48 billion, up 77% year over year. No one expects that breakneck pace to continue, as third-quarter growth slowed to 67%. Analysts -- who have historically underestimated the company's growth prospects -- expect Snowflake to close out 2022 with revenue rising 75% for the year, with sales increasing by 43% in 2023. Given the current economic headwinds, that's impressive indeed -- making its valuation much more reasonable.
That's not to say that Snowflake's stock couldn't fall further. Given the challenges in the overall economy, it certainly could. However, history teaches that calling a bottom is nearly impossible, leading experienced investors to buy quality companies when the stock is cheap -- even though it might get cheaper.
Given the secular tailwinds driving its business, its significant addressable market, and its bargain-basement price, Snowflake is one Berkshire Hathaway stock to buy now before it starts soaring.
