Warren Buffett's Berkshire Hathaway made an unusual investment three years ago by investing $735 million in Snowflake (SNOW 3.69%), a cloud-based data platform provider, when it went public in September 2020.
The investment was not in line with the Oracle of Omaha's investment philosophy as Snowflake was richly valued at that time. Also, Buffett has historically stayed away from investing in initial public offerings (IPOs), so Berkshire's stake in Snowflake was no doubt surprising. However, Berkshire's Snowflake investment paid off impressively earlier on as the stock soared in 2021, jumping to more than $400 from its IPO price of $120 in just a year.
But then, it took a big beating amid the broader sell-off in tech stocks last year and is 60% off its all-time high that it recorded in November 2021. It is worth noting that Snowflake has continued to underperform the market in 2023 as well, gaining 11% as compared to the tech-laden Nasdaq-100 Technology Sector index's 42% surge.
Buffett's Berkshire continues to own Snowflake stock even now. Its stake in the company is now valued at $978 million, though it won't be surprising to see that figure increase thanks to solid catalysts such as artificial intelligence (AI) that could power its growth.
AI could unlock a new growth opportunity for Snowflake
Snowflake's revenue in the first six months of fiscal 2024 (for the six months ended July 31, 2023) has increased an impressive 41% year over year to $1.3 billion. The company expects to finish the year with product revenue of $2.6 billion, which would be a 34% jump over last year. However, Snowflake's current revenue run rate and the fact that it is sitting on remaining performance obligations worth $3.5 billion suggest that it could easily exceed its forecast.
The remaining performance obligations refer to the total value of a company's future contracts that are yet to be fulfilled, which means that Snowflake is sitting on a solid revenue pipeline. It won't be surprising to see this pipeline growing further thanks to the growing adoption of generative AI, a trend from which Snowflake could win big-time.
Snowflake's cloud-based platform allows its customers to consolidate their data, enabling them to build applications, generate insights, and even share data with others. The company believes that data sharing is going to play an important role in the adoption of generative AI. Snowflake management points out that "models need external data to answer challenging questions," which is why the company is "uniquely positioned to enable AI workloads" as more customers are now involved in data sharing on its platform.
Snowflake has a solid base of more than 8,500 customers. This number has been growing at a nice clip, jumping 25% year over year in the fiscal second quarter of 2024. Snowflake management said on the company's August earnings conference call that 26% of its customers are now sharing data, up from 20% in the year-ago period.
Snowflake's customer base stood at 6,800 in the second quarter of fiscal 2023. So, the number of customers involved in data sharing on its platform increased from 1,360 in the year-ago quarter to just over 2,200 in the previous quarter, translating into a solid jump of 62%.
More importantly, Snowflake is looking to capitalize on the growing demand for large-language models (LLMs) and generative AI through multiple functionalities on its platform, which will allow its customers to quickly generate new insights from their data. For instance, Snowflake's Document AI solution enables its customers to "quickly and easily extract information from documents" using a large-language model.
What's more, Snowflake has partnered with Nvidia to help customers create customized generative AI models with their proprietary data using the latter's chips and the former's huge data bank. All of this indicates that Snowflake is pulling the right strings to ensure that it can make the most of the generative AI market in the long run. And that's a smart thing to do, as the generative AI market is expected to clock annual growth of 42% over the next decade, according to Bloomberg Intelligence, generating a massive $1.3 trillion in revenue at the end of the forecast period.
Is the stock a good buy now?
Snowflake is trading at an expensive 20 times sales right now, though that seems justifiable given the impressive pace of its sales growth. Investors should also note that Snowflake is much cheaper now than it was when Buffett's Berkshire Hathaway bought the stock. The company ended 2020 with a price-to-sales ratio of 163.
Even better, Snowflake's sales multiple has declined since the time it went public while its revenue growth has remained impressive.
SNOW PS Ratio data by YCharts
Catalysts such as AI and Snowflake's estimate that its addressable market could be worth a whopping $290 billion in 2027 compared to $140 billion last year tell us why analysts are anticipating the company's earnings to increase at an annual pace of 50% for the next five years. As a result, it won't be surprising to see this Warren Buffett holding turn out to be a solid long-term bet and justify its rich valuation multiple, which is why investors should consider buying it before it is too late.
