Insights

Down 53%, Here’s A Fast-Growing Software Stock That Even Warren Buffett Owns

In today’s rocky economic environment, many investors are curious about where Warren Buffett is putting his money. The Oracle of Omaha is a famed value investor who typically seeks out businesses with wide economic moats, high dividend yields, and robust cash-flow generation, many of which don’t fall under the umbrella of the fast-growing technology sector.

The star stock picker hasn’t completely shied away from high-growth tech names, however. Currently, he has roughly $1.4 billion tied up in the software company Snowflake (NYSE: SNOW). Snowflake, which provides a single platform for data storage, processing, and analytic solutions, has plunged 53% year to date amid the ongoing tech sell-off linked to high inflation and rising borrowing costs.

As a result of the software company’s fresh pullback, should investors follow Buffett’s lead, and buy the stock today?

Image source: Getty Images.

What’s happening with Snowflake’s business?

Snowflake doesn’t operate a software-as-a-service (SaaS) business model — 93% of its sales are consumption-based, meaning revenue is recognized only as consumption occurs. Unwavering inflation and the Federal Reserve’s interest rate hikes have not been easy on tech companies of late, but Snowflake has continued to expand at a blistering pace. To kick off its fiscal-year 2023, the company reported an 85% surge year over year in total revenues in the first quarter, up to $422.4 million, coupled with a net loss of $0.53 per share.  

The software enterprise also made strong headway on expanding its clientele, with total customers increasing 39.6%, up to 6,322, and the number of customers providing $1 million or more in product revenue soaring 98% to finish at 206. In my opinion, growing revenue is fantastic, but what’s more important is a company’s ability to retain customers.

Snowflake is great at doing just that — its dollar-based net revenue retention (NRR) rate is currently 174%, whereas anything above 100% is usually considered good for a business. Snowflake is easily exceeding that, a telling signal for investors. Net revenue retention rate is the percentage of recurring revenue that’s retained from existing customers over a specific time period. 

For the full fiscal year, Wall Street analysts forecast Snowflake’s total revenues to ascend 66.1% year over year to $2 billion, and its adjusted earnings per share to conclude at $0.18, a major uptick from its $0.01 per share a year ago. Next year, analysts are projecting top- and bottom-line growth of 52.7% and 122%, respectively. Today, the stock pegs a price-to-sales multiple of 33.2. That’s surely not a cheap price; however, it does represent the company’s lowest valuation since going public in September 2020. It’ll be interesting to see if Snowflake can grow into its towering valuation of today. 

Should investors follow in Buffett’s footsteps?

I believe Snowflake provides investors with a favorable margin of safety at this time. Although the company faces stiff competition from well-funded tech giants like Amazon, Microsoft, and Alphabet, it’s well positioned at the moment with an 18.9% share of the data warehousing market. Likewise, the software firm has persistently demonstrated its ability to expand at a rapid clip, implying that it should greatly benefit from the cloud computing industry’s expected compound annual growth rate (CAGR) of 17.4% through 2030. For investors with a lengthy time horizon and a little bit of risk tolerance, Snowflake makes for a compelling buy today. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Luke Meindl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft, and Snowflake Inc. The Motley Fool has a disclosure policy.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

  • This field is for validation purposes and should be left unchanged.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Rebate Rewards

Level 2 Rebate

Deposit $2,000 and get $200 Rebate
$ 200 Rebate
  • 3 Simple Steps
  • 1. Register Using The Link Below (Promo-Code: WEBREBATE)
  • 2. Deposit $2,000 and place one trade at any non-Austalian market within 30 calendar days
  • 3. Receive Your $200 Rebate
Popular

Level 1 Rebate

Deposit $1,000 and get $100 Rebate
$ 100 Rebate
  • 3 Simple Steps
  • 1. Register Using The Link Below (Promo-Code: WEBREBATE)
  • 2. Deposit $1,000 and place one trade at any non-Austalian market within 30 calendar days
  • 3. Receive Your $100 Rebate

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex Securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

EASY QUALIFICATION & LOW ENTRY
NEW CLIENT REBATE OFFER
EARN UP TO $200 CASH REBATE
Act Fast - Promotion Ends In
Click Here To Get Started
EASY QUALIFICATION & LOW ENTRY
NEW CLIENT REBATE OFFER
EARN UP TO $200 CASH REBATE
Act Fast - Promotion Ends In
Click Here For More Info