Buffett Sold Billions In Stock, But Not This 1 Tech Firm

 

However, that’s precisely what occurred when Warren Buffett purchased a slice of the cloud-based data warehousing firm Snowflake shortly before its initial public offering (IPO) in 2020.

 

And it’s easy to see why the Oracle of Omaha likes the company so much. Snowflake recently grew its total customer count by 31% to 7,828 while also sporting a perfect 100% Dresner recommendation score for the sixth year in a row.

 

So, what exactly is it that makes SNOW so unique? And is the stock a buy at today’s valuation?

 

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Snowflake: Solving The Cloud Migration

It can be a tricky exercise converting legacy business data from an out-of-date hardware model to a modern, AI-enabled cloud application.

In fact, just the sheer volume of enterprise-generated intelligence creates difficulties, as restructuring this information can be a lengthy and arduous task.

On top of that, adherence to security regulations is another cause for concern when dealing with data translation, as firms must comply with rules and regulations when handling sensitive documentation, leading to privacy and compliance issues when moving to the cloud.

Moreover, differences in architectures will pose supplementary problems for the digital transformation process, as older frameworks may have been built specifically to address individual requirements that might not be compatible with current configurations.

However, with such a gargantuan job at hand, the cash-generating potential of the sector is huge.

For instance, the opportunity afforded to companies in the cloud computing and storage space was reckoned to be worth $23.9 in the third quarter of 2022, with estimates predicting that this could soar to $135.1 billion by 2026.

Indeed, Snowflake’s management believes they’re operating in a vast and growing business, with Frank Slootman, the company’s Chairman & Chief Executive Officer, stating that the firm is on track to hit its “$10 billion” revenue goal by 2029.

Solid Sales And A Sticky Business

Given the tumultuous fortunes of many software-as-a-service companies over the last few years, Snowflake’s third quarter 2023 earnings sheet heralded some refreshingly positive news.

To begin with, the firm reported a massive spike to its top line, with $555 million in product revenue representing an uptick of 54% for the three months ended January 31, 2023.

Moreover, SNOW expanded that same metric by 70% during the full fiscal year, bringing in $1.94 billion in sales while achieving a margin of 25% in its adjusted cash flow of $520 million.

Crucially, however, the business was able to record a colossal 158% net revenue retention rate. This means that Snowflake can hold on to the customers it already has and enlarge its returns over time.

Additionally, the firm is also making headway when it comes to attracting the most lucrative clients. Its share of the Forbes Global 2000 companies grew 16%, while customers with a trailing twelve-month product revenue of over $1 million increased 79% to 330.

Slower Growth Worrying Investors 

Snowflake’s slowing growth curve should be a significant concern for anyone thinking of investing in the company right now.

For instance, in the quarters proceeding its IPO in September 2020, the business was enjoying triple-digit revenue expansion for quite some time.

Nevertheless, this trend has been losing momentum, and, although the 70% increase in product revenue disclosed during the period was uncommonly good, it marks a striking deceleration from the 106% declared the previous year.

Perhaps the principal reason for Snowflake’s stagnation is the fact that the enterprise has encountered heightened competition in the data warehousing sector. Other cloud-based corporations – such as Microsoft Azure, Amazon Web Services, and Google Cloud Platform – have initiated rival products, fomenting price pressures and reducing demand for SNOW’s own merchandise.

Another possible factor contributing to Snowflake’s sluggishness is the ongoing global shortage of semiconductors affecting computer hardware production and shipment. The resultant scarcity of microprocessors could precipitate delays in deploying Snowflake’s software, further stunting the venture’s development.

While it is noteworthy that Snowflake’s growth rate has decreased a little, the company’s key financial indicators are still substantial when compared to many other software companies.

Regardless, SNOW remains a frontrunner in the data warehousing sector, and the enterprise is devoted to directing considerable resources into its R&D efforts to advance its product offerings.

What Is Fair Value For Snowflake Stock?

Snowflake’s excellent revenue growth and gross profit margins highlight the firm’s promising future and likely profitability.

However, the company trades at an extremely steep non-GAAP PE ratio of 245x.

That said, although this would be considered high in some other industries, it’s not unusual for the waters in which Snowflake swims. For example, Cloudflare’s shares swap hands at an earnings multiple of 386x, while Shopify investors have to contend with a premium that rates the business at 1,624x its forward income.

But with its innovative platform and focus on addressing the problems that businesses face with traditional data infrastructure, Snowflake is on track to build a commanding presence in the sphere.

And, with a total addressable market estimated to be valued at $248 billion in just a few short years, that’s motive enough to buy this exciting stock.

According to 38 analysts, the consensus estimate is upside to $182 per share.

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.