Snowflake has taken a round trip back to its IPO price -- but it could bounce back.
When Snowflake (SNOW 2.31%) went public in September 2020, the cloud-based data warehousing company gained a lot of attention for two main reasons. First, it was growing like a weed. Second, Warren Buffett's Berkshire Hathaway -- which rarely invests in hypergrowth tech stocks -- acquired 6.13 million shares during its IPO. It still holds that entire position, which accounts for 0.2% of its portfolio, as of this writing.
Berkshire's decision to stick with Snowflake is interesting because it now trades below its IPO price of $120. It more than doubled on its first trade to $245. It soared to an all-time high of $401.89 on Nov. 16, 2021, but now trades at $115. Therefore, the value of Berkshire's Snowflake stake grew from $736 million to $2.46 billion before shrinking back to about $705 million.
Like many other hypergrowth tech stocks, Snowflake lost its luster as its revenue growth cooled off and rising interest rates compressed its valuations. However, I believe Snowflake might go parabolic in 2024 and beyond as its growth rates stabilize.
Large organizations often store all their data across a broad range of computing platforms, on-site software, and cloud-based services. That fragmentation across different silos makes it difficult to make data-driven decisions. Snowflake's cloud-based data warehouses pull all that data into a centralized location, clean it up, and make it much easier for third-party data mining, analytics, and artificial intelligence (AI) apps to access that information.
Cloud infrastructure giants like Amazon Web Services (AWS) and Microsoft Azure offer their own integrated cloud warehouses, but they lock customers into their broader ecosystems. Meanwhile, Snowflake's cloud warehouse is compatible with AWS, Azure, and other cloud platforms -- which makes it an ideal choice for companies with multi-cloud configurations. It also charges flexible usage-based fees instead of locking its customers into sticky subscriptions.
There's clearly a lot of demand for Snowflake's services. Its revenue soared 124% in fiscal 2021, and jumped 106% in fiscal 2022 (which ended in January 2022) as its net revenue retention rate rose from 168% to 178%. Those dizzying growth rates attracted a stampede of bulls, and the buying frenzy in hypergrowth and meme stocks in late 2021 amplified those gains.
In June 2022, Snowflake's then-CEO Frank Slootman claimed the company's product revenue (which accounted for most of its top line) would hit $10 billion in fiscal 2029. To achieve that ambitious goal, Snowflake would have needed to grow its product revenue at a compound annual growth rate (CAGR) of 36% from fiscal 2022 to fiscal 2029. But here's what actually happened.
Data source: Snowflake. *Analysts' estimates (Yahoo! Finance).
Like many other cloud-based software companies, Snowflake's growth cooled off and its retention rates slipped as the macro headwinds drove many of its customers to rein in their spending. Stiff competition from AWS' Redshift, Azure's Synapse, and similar start-ups like Databricks could be exacerbating that pressure and limiting its pricing power.
To reach $10 billion in product revenue, Snowflake would need to grow at a CAGR of 30% from fiscal 2024 to fiscal 2029. Snowflake hasn't officially withdrawn that long-term goal yet, but Slootman's unexpected retirement earlier this year raises a few red flags. Analysts expect its revenue to grow at a CAGR of 24% from fiscal 2024 to fiscal 2027.
Snowflake's revenue growth is cooling off, but its adjusted product gross, adjusted operating, and adjusted free-cash-flow (FCF) margins are all fairly stable.
Data source: Snowflake.
The company also turned profitable on a non-gaap (adjusted) basis in fiscal 2022 with an earnings per share (EPS) of $0.01. That figure rose to $0.25 in fiscal 2023 and $0.98 in fiscal 2024. Analysts expect its non-GAAP EPS to decline 36% in fiscal 2025 as its growth slows down, but rise 57% in fiscal 2026 as the macro environment gradually improves.
Snowflake's near-term outlook seems murky, but its stock now trades at just 9 times next year's sales. In comparison, it traded at 59 times its fiscal 2023 sales when it hit its record high in November 2021. Yet the company is still poised to profit from the secular expansion of the AI market as companies pour more data into analytics and AI apps.
I previously said I wouldn't touch Snowflake's stock until it revisited its IPO price, but it's now trading below that level. Just as investors were too bullish in 2021, they're now too bearish -- and Snowflake could easily surprise the market over the next year as its growth rates and retention rates stabilize again. Therefore, it could be a great stock to buy before interest rates decline and investors pivot toward higher-growth tech plays again. That's probably why Berkshire Hathaway still hasn't sold the stock.