One of Warren Buffett’s few pure-play technology investments, Snowflake (SNOW) has turned out to be quite the disappointment for the Oracle of Omaha, and for investors in general. Shares absolutely skyrocketed from the IPO price of $120 per share to as high as $429 per share before dropping back down to earth. (See Snowflake stock analysis on TipRanks)
This manufacturer of cloud-based equipment and infrastructure is on the right side of a powerful trend. Cloud computing is anticipated to grow at a CAGR of 18% from 2019 to 2027, an absolutely incredible rate of growth.
Moreover, this past pandemic year has turned out to be quite the boost for pure-plays in the cloud sector. As such, Snowflake’s highly anticipated IPO took the market by storm. (See TipRanks' IPO Calendar)
Today, investors can get in on the action for around $250 per share. That’s a significant discount for a high-growth name like Snowflake.
Exactly when Buffett bought is an unknown. However, according to Buffett’s recently-filed 13-F, we can see that the Oracle of Omaha held steady with his investment this past quarter. He’s not buying, but he’s not selling either.
Here’s why investors who haven’t gotten in on the action may want to do so.
Business Model Built for Flexibility
The Software-as-a-Service (SaaS) revenue streams that cloud companies provide to investors are certainly intriguing. Nevertheless, cloud customers continue to demand more in terms of flexibility from cloud providers. One of Snowflake’s unique value propositions is the company’s relatively flexible business model, compared to its peers.
The company touts this ability on its website: “Whether you’re a business or technology professional, get the performance, flexibility, and near-infinite scalability to easily load, integrate, analyze and securely share your data.”
Snowflake allows customers to fully customize their services, and to pay only for the services they need, instead of paying for bulked up packages containing unnecessary services. Clients have access to data warehousing, data lakes, data engineering, data science and data application development. These are core growth drivers for many companies, and are generally inaccessible outside of providers like Snowflake.
Indeed, Snowflake is a provider every growth company might wish for. Customers can optimize their spend and improve their analytics capabilities overnight. Such insights are typically difficult (and costly) to acquire or hire for organically.
Accordingly, the growth Snowflake has generated appears to be sustainable from an organic perspective. From this angle, it's clear to see why moat-focused investors like Buffett appreciate Snowflake’s business model.
Earnings Highlight the Real Growth Potential of Snowflake
Any company that grows revenues at a triple-digit rate is deserving of a hard look by growth investors. Snowflake easily fits into this category.
During the company’s most recent earnings results, revenue came in at consensus-shattering levels. The company reported more than $190 million in revenue, with a year-over-year growth rate of 117%. That ought to be more than good enough for growth investors.
That being said, Snowflake fell on these results, as forward guidance provided by the company wasn’t as stellar as the market was pricing in. For growth stocks like this, it’s always about the next quarter. This March 3rd earnings release was already likely priced in well before March 3rd.
Snowflake's selloff may indeed be warranted. However, growth investors need to keep these numbers in context, relative to other growth stocks in the market today.
What Analysts Are Saying About SNOW Stock
According to TipRanks’ analyst rating consensus, SNOW stock comes in as a Moderate Buy. Out of 21 analyst ratings, there are 11 Buy recommendations and 10 Hold recommendations.
As for price targets, the average analyst SNOW price target is $276.28. Analyst price targets range from a low of $235.00 per share to a high of $320.00 per share.
Snowflake isn’t a cheap stock, by any stretch of the imagination. This company has a valuation that’s still in the nosebleeds. Accordingly, any inkling of slowing growth is enough to take such stocks on a nasty ride.
However, there are indications that much of this bearish sentiment is already priced into Snowflake stock today. For investors bullish on the cloud, this is among the best stocks in the market today, as corroborated by Warren Buffett's investment in it.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.