Warren Buffett's Berkshire Hathaway (BRK.A +0.43%)(BRK.B +0.45%) has more than half of its portfolio invested in technology stocks, and a very small sliver of that total is allocated to Snowflake (SNOW 2.38%), a data management company with a powerful tailwind at its back.
Data is the foundation of artificial intelligence (AI), and demand for AI software is expected to skyrocket in the coming years. Ark Invest says the market could compound at 42% annually to reach $14 trillion by 2030. That should naturally translate into demand for data management solutions. To quote Snowflake CEO Frank Slootman, businesses "cannot have an AI strategy without a data strategy."
That tailwind could drive Snowflake stock 200% higher over the next five years, according to Wall Street analysts. Here's what investors should know.
NYSE: SNOW
Key Data Points
Snowflake solves the problem of data silos
The average business uses more than 100 software products, and those applications often run across several clouds, scattering information to disparate systems and machines. The end result is a complex web of siloed datasets that are difficult to consolidate. Snowflake solves that problem, and it does so without burdening IT teams with a patchwork of point solutions.
The Snowflake platform supports data engineering for ingestion, data lakes for storage, data warehousing for analytics, and data sharing for collaboration. That last point is particularly relevant because supplemental datasets can help businesses train artificial intelligence (AI) models. Indeed, CEO Frank Slootman says, "Data sharing makes Snowflake uniquely positioned to enable AI workloads."
However, Snowflake offers more than broad functionality. Its platform is also cloud-neutral, meaning it runs across all three major public clouds so that customers can work with the vendor(s) of their choosing. Data management and analytics solutions from big tech companies like Amazon Web Services and Alphabet's Google Cloud lack that interoperability.
Here's the upshot: No other product on the market offers the same breadth of functionality and flexibility as Snowflake. That competitive advantage is key. It is unlikely that Warren Buffett purchased shares of Snowflake himself -- it was probably one of his fellow investment managers at Berkshire, Todd Combs or Ted Weschler -- but Buffett has said that a durable competitive advantage is the most important quality a business can possess. Snowflake appears to have one.
Snowflake is chasing a massive market opportunity
Snowflake is the logical center of gravity for enterprise data, and the company is reaping the benefits of that position. It's the market leader in data warehousing, and its customer base includes nearly one-third of the Forbes Global 2,000. That means many of the largest enterprises in the world rely on Snowflake in some capacity, and their usage could expand as they invest in technologies like machine learning and generative AI.
Demand has softened amid challenging macroeconomic conditions, but Snowflake still delivered solid results in the second quarter of fiscal 2024 (ended July 31). The company increased its customer count by 25%, and the average customer spent 42% more compared to the prior year. In turn, revenue rose 37% to $640 million, and non-GAAP (generally accepted accounting principles) earnings improved to $0.22 per diluted share, up from $0.01 per diluted share last year.
Going forward, investors have cause to believe Snowflake will maintain its momentum. The company currently values its addressable market at $140 billion, but management says that figure could reach $290 billion by 2027 as more enterprises look to unlock value in their data. Snowflake is well-positioned to monetize that tailwind.
Snowflake stock could triple by 2028
Snowflake currently trades at 19.5 times sales, a discount to the three-year average of 66 times sales, and the company has a market capitalization of $48 billion. But that valuation could triple to reach $144 billion in five years -- meaning shareholders would see annual returns of 24.5% through late 2028 -- if Snowflake grows revenue at 31% annually in the interim and trades at 15.3 times sales at the end of that time period.
That revenue trajectory is reasonable (and even slightly conservative) compared to projections from Wall Street and Snowflake management. Morgan Stanley has outlined three possible scenarios, and the base case assumes annual revenue growth of 31% through 2029. Similarly, Snowflake management says revenue will reach $10 billion by fiscal 2029 (ends Jan. 31, 2029), implying annual growth of 37% through the end of that period.
The estimated price-to-sales multiple also leaves room for error. For instance, even if the stock trades at 10 times sales in five years, shareholders would still see returns of 14.4% annually in the interim, provided Snowflake grows revenue at 31% annually.
In short, this Buffett stock has a great shot at beating the market, even if it doesn't triple by 2028.
