Want to profit from the rise of artificial intelligence? Consider investing in Berkshire Hathaway's most surprising AI bet.
In September 2020, Berkshire Hathaway made an unusual move. The famous investment conglomerate bought stock in a company at its initial public offering (IPO) -- something it hadn't done since Warren Buffett became the company's CEO in May 1965.
Most likely under the advisem*nt of one of Buffett's top investment lieutenants, Berkshire invested $735 million in Snowflake (SNOW 0.60%) at a price of $120 per share. While the company's stock has battled through volatility and is back to trading well above that level, it's still down 24% from its price at market close on the day of its IPO. Even more striking, the company's share price is down 52% from the high that it reached in February 2021.
If you're looking for Buffett-backed investment opportunities with explosive potential, read on to see why investing in Snowflake while it's still down big would be a smart move.
Unusual in more ways than one
Snowflake is a data software specialist that's valued at roughly 23 times expected forward sales. Even on a non-GAAP (adjusted) basis, the company's profits will likely be minimal for the year.
With that kind of valuation profile, it's arguably the most growth-dependent stock in the entire Berkshire Hathaway portfolio. What attracted Buffett's company to such an unusual investment?
SNOW PS Ratio (Forward) data by YCharts.
Snowflake is a leading provider of data technology services for large businesses and organizations. The core of the company's business is its Data Cloud platform, which makes it possible to combine and analyze information from otherwise walled-off sources.
According to a study conducted by S&P Global Intelligence, 98% of the enterprises that it surveyed were already using or planning to use cloud infrastructure services from multiple providers. But while the vast majority of large organizations depend on services provided by cloud leaders including Amazon, Microsoft, and Alphabet, data generated across these distinct sources isn't easily combinable in many cases.
Snowflake's data warehousing tech solves that problem and makes it possible for customers to execute strategies and run applications that integrate a much wider array of valuable data. With analytics and artificial intelligence (AI) poised to continue reshaping the world, the ability to gather and parse relevant data has never been more essential.
"There's no AI strategy without data strategy." That's been a recent mantra from Snowflake's management, and it's a statement that perfectly encapsulates the company's position and opportunities in the AI market.
Snowflake is expanding rapidly and has big growth potential
The third quarter of Snowflake's 2024 fiscal year concluded at the end of October, and the company had 8,907 total customers at the end of the period, up 23.5% year over year. Meanwhile, 647 of the Forbes Global 2000 companies were using its services, up from 586 at the end of Q3 in the previous fiscal year.
Aided by new customer additions and increased spending from those already using its services, Snowflake's revenue jumped 34% year over year to reach $698.5 million. Meanwhile, adjusted free cash flow surged 70% year over year to hit roughly $111 million.
While the company has a heavily growth-dependent valuation, it's expanding sales and margins at an impressive rate -- and there are big growth opportunities still ahead.
Snowflake estimates that its product revenue will expand from $2.65 billion in fiscal 2024 to roughly $10 billion in fiscal 2029 -- good for a compound annual growth rate (CAGR) of roughly 30.4%. Meanwhile, it anticipates that its non-GAAP (adjusted) free-cash-flow margin will expand from 27% to 30%.
With a market cap of roughly $63.5 billion, Snowflake is trading at roughly 21 times the estimated $3 billion in annual adjusted free cash flow that it expects to be generating at the end of that projection period. The company's current valuation is admittedly heavily forward-looking, but the passage of time could show that shares were actually quite cheap at today's prices.
Snowflake's guidance for product revenue to increase at a roughly 30% CAGR over the next five years suggests only moderate growth deceleration from current levels -- even as the size of its sales base is poised to expand dramatically. There's a good chance that the business will still be posting strong double-digit sales growth beyond fiscal 2029, all while posting robust free cash-flow margins.
Snowflake also has the benefit of a strong balance sheet. The company closed out fiscal Q3 with $4.5 billion in cash and equivalents and zero debt.
While Snowflake's growth-oriented valuation makes it one of the riskier stocks in Berkshire's portfolio, the company's business is posting impressive results and has solid financial foundations. For investors interested in owning Buffett-backed AI stocks, the data specialist could go on to be a market-crushing winner.
John Mackey, former 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. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Berkshire Hathaway, Microsoft, S&P Global, and Snowflake. The Motley Fool has a disclosure policy.
