Down 53%, here’s a fast-growing software stock that even Warren Buffett owns
In today’s tough economic environment, many investors are curious about where Warren Buffett is putting his money. The Oracle of Omaha is a famous value investor who typically seeks companies with broad economic moats, high dividend yields and robust cash flow generation, many of which fall outside the fast-growing tech sector.
However, the star stock picker hasn’t completely shunned high-growth tech names. Currently, he has about $1.4 billion tied up in the software company Snowflake (SNOW 2.97%). Snowflake, which provides a single platform for data storage, processing and analytics solutions, has fallen 53% year-to-date amid the ongoing tech selloff tied to high inflation and rising borrowing costs.
In the wake of the software company’s further pullback, should investors follow Buffett’s lead and buy the stock today?
What’s going on with Snowflake’s business?
Snowflake does not operate a software-as-a-service (SaaS) business model: 93% of its sales are consumption-based, meaning revenue is only recognized as consumption occurs . Unabated inflation and Federal Reserve interest rate hikes haven’t been easy for tech companies lately, but Snowflake has continued to grow at a blistering pace. To kick off its 2023 fiscal year, the company reported an 85% year-over-year increase in total revenue in the first quarter to $422.4 million, coupled with a net loss of $0.53. per share.
The software company also made great strides in expanding its customer base, with the total number of customers increasing by 39.6% to 6,322, and the number of customers providing $1 million or more in product revenue up 98% to finish at 206. In my opinion, revenue growth is fantastic, but what’s more important is a company’s ability to retain customers.
Snowflake is excellent at doing just that – its dollar-based Net Revenue Retention Rate (NRR) is currently 174%, while anything over 100% is generally considered good for a business. Snowflake easily tops that, a telling signal for investors. Net revenue retention rate is the percentage of recurring revenue retained from existing customers over a period of time.
For the full year, Wall Street analysts expect Snowflake’s total revenue to rise 66.1% year-over-year to $2 billion, and its adjusted earnings per share to will end at $0.18, a major increase from its $0.01 per share a year ago. Next year, analysts predict revenue and net income growth of 52.7% and 122%, respectively. Today, the stock is setting a price/sell multiple of 33.2. It is surely not a cheap price; however, it represents the company’s lowest valuation since its IPO in September 2020. It will be interesting to see if Snowflake can achieve its towering valuation today.
Should investors follow in Buffett’s footsteps?
I think Snowflake is giving investors a favorable margin of safety right now. Although the company faces fierce competition from well-funded tech giants like Amazon, Microsoftand Alphabet, it is well positioned at the moment with an 18.9% market share of the data warehousing market. Likewise, the software company has consistently demonstrated its ability to grow at a rapid pace, implying that it stands to benefit greatly from the cloud computing industry’s predicted compound annual growth rate (CAGR) of 17.4. % to 2030. For investors with a long time horizon and a little risk tolerance, Snowflake is a compelling buy today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Luc Meindl has no position in the stocks mentioned. The Motley Fool owns and endorses Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft and Snowflake Inc. The Motley Fool has a disclosure policy.
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