Berkshire Hathaway CEO Warren Buffett made his name as a value investor. In fact, Buffett was so successful at applying principles laid out by value-investing guru Benjamin Graham that he earned a nickname as well — “the Oracle of Omaha.”
But while the Berkshire portfolio is weighted toward companies including Apple, Bank of America, and Chevron that are already highly profitable, the investment company also holds positions in some stocks with much more growth-dependent valuations. With that said, Snowflake (SNOW -4.04%) is a growth stock in the Berkshire portfolio that’s worth considering now that it’s trading down 62% from its high. Here’s a closer look at why it should be on your radar.
Get your piece of the data boom
“Data is the new oil” has emerged as a popular refrain among technology insiders and analysts. It’s a reflection on how the ability to gather and analyze a wide range of valuable information has become increasingly central to organizational and operational success.
Admittedly, oil has actually been the new oil lately, and Berkshire Hathaway’s positions in energy companies, including Chevron and Occidental Petroleum, played a huge role in the investment conglomerate’s market-crushing performance over the last year.
But investors shouldn’t lose sight of the long-term importance of the data-analytics revolution that’s currently unfolding.
Through the rise of cloud computing and the rapid growth in the number of connected devices and virtual machines sending information online, more data is being generated than ever before, and the next decade and beyond will see an absolute explosion in the amount of data being created.
Snowflake’s technologies are making it possible for its customers to get the most out of the data-analytics revolution. The company’s Data Cloud platform effectively breaks down walls that prevent information from being shared and analyzed across Amazon, Microsoft, and Alphabet‘s respective cloud-infrastructure services — and it’s on track to play a huge role in the ongoing Big Data revolution.
Buffett and Berkshire initiated a position in Snowflake stock at the time of the data-services company’s initial public offering (IPO) in 2020. Strikingly, it marked the first time that a Buffett-directed company invested in a stock at its IPO since Ford went public in 1956.
Snowflake’s incredible growth opportunity
Snowflake’s business model sets it up to grow with its clients. These days, most cloud software companies lean heavily into the software-as-a-service (SaaS) model because it helps establish a foundation of recurring revenue and helps to mitigate sales and marketing expenses. But Snowflake takes a different approach.
Rather than relying heavily on the SaaS model, Snowflake’s business is built around a consumption-based model, and 93% of its total sales are generated from usage-based billing.
Net-revenue-retention rate is a metric that tracks how much existing customers increased their spending compared to their spending level in the prior-year period. Today, many leading software providers emphasize net revenue retention because it provides an additional avenue to growth beyond attracting new customers.
Through its usage-based model, Snowflake has been able to post net-revenue-retention rates that are the envy of the broader software industry. In the third quarter, the company reported a 165% net revenue retention rate, which means that customers who were already on board with its platform increased their spending 65% compared to the prior-year period. Meanwhile, the company’s total product revenue grew 67% year over year to reach $522.8 million in the third quarter, and it registered a non-GAAP (adjusted) gross margin in the period.
This could be Berkshire’s best stock over the next decade
Snowflake is one of the most atypical holdings in Berkshire’s equity portfolio.
With the data-services specialist valued at roughly $49 billion and trading at approximately 24 times expected forward sales, it’s arguably more growth-dependent than any other stock held by Buffett’s investment conglomerate. I also think it has the potential to be the best performing stock in the company’s portfolio over the next 10 years.
Snowflake’s Data Cloud platform lets its customers manage all their data through a single engine. It also provides marketplace services, which allow clients to share, sell, and buy access to other data pools. Because of these capabilities, Snowflake’s data warehouse platform is gaining popularity as a solution for developing and running cloud-native applications.
As a growing number of applications are built and scaled on top of its platform and the overall market for cloud-based apps continues to expand, the company could see incredible consumption growth catalysts that translate into returns for shareholders.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Bank of America, Berkshire Hathaway, Microsoft, and Snowflake. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.