Will This Buffett Stock Rocket to the Moon?

Will Snowflake Stock Recover? Cloud computing and data analytics company Snowflake (NYSE:SNOW) is one of relatively few tech stocks in Warren Buffett’s famously value-driven portfolio.

 

Unusually, Buffett’s Berkshire Hathaway bought the company’s IPO, encroaching on a longstanding rule of investing in the process. This year, the stock has lost over 55 percent of its value, making it a potentially attractive buy for growth investors. 

 

Snowflake is a cloud computing company specializing in data storage and management. The company’s data architecture supports a variety of common data science and engineering workflows.

 

While Snowflake provides services to a wide range of government, business and academic entities, some of its largest enterprise customers include PepsiCo, Cardinal Health and Dollar General.

In Q3, Snowflake’s revenue grew 67 percent year-over-year to reach $557 million. On a non-GAAP basis, gross margin on product revenue reached 75 percent. Snowflake’s customer base grew to 7,292 clients, including 287 contributing $1 million or more in product revenue over the last 12 months.

 

The company’s earnings, however, were less promising. Snowflake reported a loss of $0.67 per share, significantly below the consensus estimate of $-0.51 per share. A lower outlook for the next quarter also caused shares of the stock to slide after Q3 earnings were released.

 

Snowflake’s long-term growth prospects are the primary argument in favor of the stock. Over the next five years, analysts expect the company to grow at a massive CAGR of 295 percent. This rate of growth would likely cause the stock to multiply many times over, potentially generating enormous returns for investors.

 

With revenues growing quickly and a strong gross margin, it’s far from difficult to see Snowflake’s eventual path to profitability.

 

Analysts currently expect the company to continue losing money into 2023, though at a slower rate. As more businesses continue to turn to Snowflake for their data needs, though, the company will likely begin to pare its losses and eventually return to positive earnings territory.

 

Analysts are generally bullish on Snowflake, though there are mixed views on the stock. The median target price for Snowflake in the coming 12 months is $185, 27.9 percent higher than the most recent price of $144.59.

 

The stock holds a consensus buy rating, with 23 out of 40 analysts recommending it. 11 analysts, however, give the stock a hold rating, while 3 more rate it as a sell.

 

Unusually for a Buffett stock, Snowflake’s valuation isn’t particularly attractive. The stock currently trades at over 600 times expected forward earnings and nearly 25x sales.

 

While the company’s growth potential obviously mitigates these problems somewhat, value investors may find Snowflake too pricey.

 

Snowflake also maintains a strong cash position that somewhat strengthens its value proposition. As of Q3, the company was sitting on a stockpile of $819 million in cash and cash equivalents. While this number has dropped over the past year, Snowflake is still heavy on cash and seems fully capable of meeting all foreseeable obligations.

 

The largest risk factor for Snowflake is its streak of deepening losses. Despite briefly achieving quarterly profitability in Q3 2021, the company has seen its earnings fall further into negative territory in every successive quarter since.

 

Snowflake has consistently underperformed earnings estimates this year, and its losing streak could extend into 2023 if a general economic slowdown takes place.

 

The company is also operating in an increasingly competitive business niche. Thanks to the rapid growth of cloud computing and data management, many large tech companies are aggressively competing for market share in these areas. Among Snowflake’s competitors are well-known tech names such as Amazon, MongoDB and Oracle.

 

Finally, Snowflake stock already has a great deal of growth built into its current pricing. If the company doesn’t see outsized growth in the coming years, the share price may continue to stagnate.

 

Although Snowflake has a decent moat thanks to its integrated data analytics and storage platform and its stable of enterprise-level customers, increased competition could hamper its growth.

 

Snowflake stock is a mixed bag, but it has a great deal of potential. With the stock massively sold off this year and the company having enormous growth prospects, Snowflake has the potential to be a parabolic stock.

 

Despite short-term challenges, Snowflake has enough cash, a strong enough competitive advantage and the growth runway needed for its stock to perform extremely well over the next several years.

 

The biggest risk facing Snowflake investors is the stock’s current valuation. With so much growth already priced in, the company will need to deliver superior performance in order to justify its market capitalization.

 

Fortunately, current growth numbers suggest that management can drive that expansion as required. If Snowflake stays on its present trajectory, both a recovery in share prices and long-term profitability for the company seem likely.

 

Ultimately, Snowflake could be a decent choice for risk-tolerant investors who are willing to buy and hold for multiple years. The stock could still see substantial volatility before a potential recovery, and a surge in prices is far from guaranteed. The growth rewards from Snowflake, however, seem to justify its risks. As such, a small position in Snowflake may be a good way for growth investors to realize outsized gains on a portion of their portfolios.

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