Warren Buffett is broadly considered to be history's best value investor. After acquiring a controlling stake in Berkshire Hathaway at a price of $18 per share in May 1965, the Oracle of Omaha used what had been a struggling textiles business as the foundation and namesake for what would become the world's most successful investment conglomerates. Today, a single share of Berkshire's Class A stock trades at more than $500,000 per share.
But while Berkshire's investment strategies remain broadly value-oriented, Buffett's company does own positions in some potentially explosive growth stocks. Within that mold, it also has exposure to the rapidly unfolding artificial intelligence (AI) revolution -- and I believe one stock in the Berkshire portfolio looks particularly promising.
Read on to see why I think that this company will be Buffett's best-performing AI stock over the next five years.
Image source: The Motley Fool.
One of Berkshire's most unusual investments
In September 2020, Berkshire did something unusual: It purchased a stock on the day of its initial public offering (IPO). Buffett has said that IPOs tend to be hype-driven and present unfavorable dynamics for buyers, but portfolio manager Todd Combs opted to invest in Snowflake (SNOW 2.69%) on the day of its public debut. The purchase marked the first time that a Buffett-led company had bought into an IPO on the stock's first trading day since his previous business -- Buffett Associates Ltd. -- invested in Ford all the way back in 1956. That was six years before Buffett took control of Berkshire.
To date, Snowflake is the only stock purchased by Berkshire Hathaway on the day of its IPO -- and the stock has actually seen volatile trading since going public. Shares actually trade down roughly 30% from market close on the day of its debut, and they're down 56% from the high reached in November 2021.
While the company's growth-dependent valuation opens the door for continuing trading volatility, an AI-powered rally could be heating up for Snowflake.
What makes Snowflake so special
Snowflake is a software company focused on providing tools that allow customers to combine, store, and analyze data. In addition to facilitating the combination of data from otherwise walled-off cloud infrastructure services, the company's Data Cloud platform makes it possible to share information access across networks and to buy and sell access to data. Meanwhile, the company's Built By Snowflake service exists on top of Data Cloud and allows users to build, execute, and scale applications that natively integrate the platforms' data warehousing and analytics capabilities.
Snowflake's core services have been built for the age of big data and designed from the ground up with AI and machine-learning applications in mind. While data generation has grown by incredible leaps and bounds since the start of this century, the data explosion is still just getting started.
According to Tokyo Electron CEO Toshiki Kawai, we're actually still in the age of "small data." Kawai expects that annual data generation will have grown by tenfold by 2030. By 2040, he expects that annual data generation will have grown another hundredfold.
The ability to gather, combine, and analyze valuable data is central to getting good results from AI and machine-learning applications, and Snowflake is perfectly positioned to push these revolutionary tech trends forward and benefit from their progression.
Snowflake is already scoring wins and has huge potential
With 7,828 customers at the close of its 2023 fiscal year, which ended this past January, Snowflake's customer base was up 31% on an annual basis. By attracting increased spending from existing customers, the company has also been able to boost the average value of its client relationships. The data services specialist closed out its last fiscal year with 330 customers who each generated more than $1 million in annual product sales, representing a 79% year-over-year increase for the number of customers in the cohort.
Thanks to client additions and expanding business relationships, Snowflake was able to grow its product revenue by 70% last year to reach $1.94 billion. Additionally, the company recorded a 25% non-GAAP (generally accepted accounting principles) adjusted free cash flow (FCF) margin in its last fiscal year, up from a 12% FCF margin in the previous year.
Even with macroeconomic headwinds pressuring growth momentum, the company expects to increase sales 40% to hit $2.7 billion in its current fiscal year. The company expects its adjusted FCF margin to hold steady at 25%, but it admittedly still trades at highly growth-dependent multiples.
This AI growth stock has explosive potential
Trading at roughly 20 times this year's expected sales, Snowflake has a valuation profile unlike any other company in Berkshire Hathaway's stock portfolio.
SNOW PS Ratio (Forward) data by YCharts
Based on management's most recent guidance, the business is on track to record roughly $676.25 million in adjusted FCF this year, which works out to a forward FCF multiple of roughly 85 based on the company's current $57.5 billion market cap. That still implies some lofty growth expectations, but there are good reasons to think that the company can deliver big wins for risk-tolerant investors willing to play the long game.
By the close of its fiscal year ending in January 2029, Snowflake expects that it will have more than quintupled its product revenue to reach $10 billion and maintain a 25% adjusted free cash flow margin. With the stock trading at approximately 23 times the expected cash flow for that fiscal year, there should be little doubt shares are a risky investment. However, the company could still be at a relatively early stage in its long-term growth story at that point.
Snowflake occupies a unique position in the data services industry, and it's poised to play a key role in the AI revolution. The stock's risk profile means that it won't be a great fit for every investor, but I believe the company has what it takes to be an explosive winner for those aiming to capitalize on the rise of artificial intelligence.
