High Growth Software Stock Warren Buffett Owns

Warren Buffett’s passion for his holding company, Berkshire Hathaway, hasn’t dimmed in the slightest though he is approaching his 92nd birthday. While other nonagenarians focus on the pleasures of retirement, Buffett continues to lead Berkshire Hathaway using the same basic strategies that brought him unprecedented success over the last 55 years.

At well over $400,000 per share, Berkshire Hathaway Class A shares hold the title of the world’s most expensive stock. That price reflects decades of growth – more than 102,000 percent since Buffett took control of the company in 1965.

To look at it another way, Berkshire Hathaway has delivered average annual returns of 20 percent, which is near twice the yearly returns of the S&P 500 during the same period.

Warren Buffett’s strategy is simple: buy undervalued companies and hold them forever. Before any stock goes into Berkshire Hathaway’s portfolio, Buffett ensures that the business has a solid foundation to support long-term growth. Companies that meet his stringent criteria make the cut if – and only if – they can be purchased at a reasonable price.

The Oracle of Omaha has proven again and again that his strategy works regardless of market conditions. That’s why Buffett’s trades get attention from investors and financial service professionals, and many attempt to emulate Buffett’s style as they build portfolios of their own.

Anyone following Warren Buffett’s career knows that he rarely invests in IPOs. He prefers established companies that produce the sort of goods and services people want no matter what the economy is doing. That’s why it came as a shock when Berkshire Hathaway, at Buffett’s direction, chose to invest in Snowflake’s IPO.

Tech companies have never been high on Warren Buffett’s list of favorites, and before Snowflake’s September 2020 debut, he hadn’t participated in any IPOs.

What’s so special about Snowflake? Why did Snowflake stock drop? And more importantly, will Snowflake stock recover? In other words, is Snowflake stock a buy?

What Makes Snowflake So Special?

The transition to cloud computing made it easy and inexpensive to collect and store vast amounts of data, and companies of every size started taking advantage of that opportunity immediately.

However, they ran into a problem when they attempted to mine and analyze all of that information: their assorted data storage platforms couldn’t “talk” to each other.

As a result, it wasn’t possible to examine data across sources in an efficient manner, making critical insights unavailable. Snowflake’s signature product, the Snowflake Data Cloud, knocks down silos and pulls information from everywhere it is stored.

Companies have access to data collected across internal divisions, as well as the data available from suppliers, customers, and business partners. The information can be combined in new ways to gather business insights that were previously unavailable.

Snowflake Data Cloud simplifies what was once an exceptionally complex process so companies can analyze data points in new combinations. It’s a highly sought-after capability, as evidenced by Snowflake’s rapidly growing client base – and its rising revenue.

Why Did Snowflake Stock Drop?

It hasn’t been a great year for the stock market. Interest rates are going up, and inflation is alarmingly high, so investors are shying away from growth stocks in favor of safer assets. Many tech stocks are classified in the growth category. Their businesses are expanding, but profits aren’t there quite yet.

The tech-heavy Nasdaq has been hit particularly hard in 2022 because of the trend away from growth stocks. As of mid-August, it is down roughly 18 percent year-to-date, and many Nasdaq stocks have fallen more than that.

Meta (Facebook) stock dropped almost 50 percent for the year, and Tesla stock has fallen more than 25 percent. NVIDIA stock lost nearly 40 percent of its value in 2022, and even Netflix stock is struggling. The streaming service has declined by more than 50 percent.

Snowflake stock has also lost more than half of its value, which puts it around 33 percent lower than its opening price of $245 back in September 2020. However, given current market conditions, seasoned investors aren’t worried.

They are more interested in the company’s long-term prospects, and they consider this a perfect time to increase their positions. After all, given the company’s rate of growth, it appears likely that share prices will never be this low again.

Will Snowflake Stock Recover?

Snowflake was the first to offer a solution for one of the most pressing problems in business, and that’s why the company caught Warren Buffett’s attention. In the first quarter of fiscal 2023, Snowflake reported an 85 percent year-over-year increase in revenue for a total of $422.4 million.

It’s true that Snowflake is still operating at a net loss, which totaled $0.53 per share for the quarter, but that’s normal for an emerging tech company. The more important consideration for investors is that Snowflake is exceeding expectations when it comes to the metrics that matter.

For example, Snowflake’s client list is growing rapidly – that figure is up by nearly 40 percent. Better still, Snowflake increased the number of clients that spend $1 million+ by 98 percent.

However, the biggest test is whether Snowflake’s customers stuck around – especially since Snowflake’s business model is usage-based rather than subscription-based. Snowflake passed that test with flying colors, delivering a dollar-based net revenue retention (NRR) rate of 174 percent. For perspective, 100 percent is considered strong.

With all of that in mind, it is clear why Warren Buffett is a fan of Snowflake. Industry experts, market professionals, and stock analysts are confident that Snowflake stock will recover and go on to achieve impressive new heights long-term.

Is Snowflake Stock A Buy?

Snowflake is selling at a price-to-sales ratio of around 33, which is comparatively high. That figure demonstrates the faith investors still have in the stock, despite its 2022 losses. Analysts have projected that total revenues will reach $2 billion for fiscal 2023. If accurate, that’s an increase of more than 60 percent year-over-year.

Adjusted earnings per share are projected to come in at $0.18 for the fiscal year, which may not sound like much, but it is progress. For fiscal 2024, analysts expect revenue growth of approximately 52 percent, and they have suggested earnings per share could increase by as much as 122 percent.

That rate of growth is uncommon, which makes Snowflake stock a buy. However, as with any Warren Buffett stock, the most impressive returns will be realized over decades. Investors who choose the Warren Buffett strategy of buying and holding Snowflake stock long-term are likely to be rewarded for their patience.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.