Warren Buffett has long profited by buying established companies in some measure of distress. His approach evolved as conditions changed over the years, most notably with his about-face on technology stocks. That shift eventually led to Apple making up more than 45% of the Berkshire Hathaway portfolio.
Moreover, Berkshire takes into account other philosophies, as his lieutenants make more of the investment decisions. One notable change is with IPO stocks, a type of investment Buffett always avoided. Given that sentiment, one has to assume his lieutenants made the calls to buy Snowflake (SNOW 3.69%) and Nu Holdings (NU 1.66%).
Now, with those stocks taking advantage of emerging opportunities, they could make investors very wealthy over time.
1. Snowflake
Snowflake leads the way in the data cloud. It eliminates the lack of control over an entity's data by storing it in a central repository. From that standpoint, one administrator can secure data, monitor changes, and grant permission to read or modify the data as needed.
Indeed, data clouds from companies like Amazon or Microsoft compete with Snowflake. But Snowflake stands out with its interoperability. This means it can work well with all cloud infrastructure providers as a neutral platform for storing and protecting data.
Buffett's team saw this potential early, making an investment before the company's 2020 IPO. Berkshire holds just over 6.1 million shares, around 1.9% of all outstanding shares.
Snowflake's data cloud has become increasingly popular as its customer base of over 8,500 grew 25% over the previous year. And with net revenue retention at 142%, the average long-term customer spent 42% more on the platform than one year ago. Thus, it should surprise few that in the first two quarters of fiscal 2024 (ended July 31), revenue was $1.3 billion, a 41% increase versus the same period in fiscal 2023.
Still, for all the revenue growth, Snowflake is very un-Buffett-like in earnings. Operating expenses rose 44% over the same period. That caused it to lose $453 million in the first half of fiscal 2024, an increase from $389 million one year ago. Perhaps for that reason, Snowflake has fallen 10% over the last 12 months; yet, at a price-to-sales (P/S) ratio of 20, it remains very pricey. Hence, Snowflake will have to reduce its operating expense growth amid massive revenue increases.
Nonetheless, with $3.75 billion in liquidity, Snowflake can maintain the current pace of losses for a long time to come. And as more customers adopt the data cloud, Snowflake should deliver for investors over time.
2. Nu Holdings
Another growth market of interest to Buffett's team is Latin American fintech Nu Holdings. Unlike in the U.S., a large percentage of Latin America's population lacks a bank account and a credit card. This means they must turn to products such as prepaid cards and digital wallets to buy online.
However, Nu is working to change that. The NuBank parent recently issued the first credit card to nearly 6 million Brazilians. Brazil makes up 79 million of Nu's 84 million customers, and in Brazil, 49% of the adult population has at least one Nu account.
With Brazil approaching saturation, Nu is repeating this formula in Mexico and Colombia. Moreover, with the customer count rising 28% over the last year, those countries should help Nu continue its rapid growth. Those increases helped boost revenue for the first half of 2023 to $3.5 billion, a 71% yearly increase.
Furthermore, operating expenses rose by just 15% over that period. Consequently, Nu has turned profitable, earning a net income of $367 million in the first six months of 2023. The company lost $75 million during the same period in 2022.
Buffett's team saw this potential early. It bought over 107 million shares, or about 2.3% of its outstanding shares, around the time of the December 2021 IPO. And due to its poorly timed IPO, one can buy the fintech stock near that IPO price despite a 100% rebound in 2023.
Additionally, Nu sells at a forward P/E ratio of 37, a low valuation considering the company's massive growth prospects. As more Mexicans, Colombians, and Brazilians join the financial system, Nu stock will likely make Buffett and the shareholders who follow him richer over time.
