1 Warren Buffett Stock That Could Go Parabolic in 2024 and Beyond

When Snowflake (SNOW 2.31%) went public in September 2020, the cloud-based data storage company has 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 — purchased 6.13 million shares during the IPO. He still holds the entire position, which represents 0.2% of his portfolio at the time of writing.

Berkshire’s decision to stick with Snowflake is interesting because it now trades below its IPO price of $120. It doubled on the first trade to $245. It reached an all-time high of $401.89 on November 16, 2021, but is now trading at $115. As a result, the value of Berkshire Snowflake’s stake rose from $736 million to $2.46 billion, before falling again to about $705 million.

Image source: Getty Images.

Like many hypergrowth tech stocks, Snowflake lost its luster as earnings growth cooled and rising interest rates compressed its valuations. However, I believe Snowflake could turn parabolic in 2024 and beyond as its growth rates stabilize.

Why did Snowflake’s stock go up initially?

Large organizations often store all their data on a wide range of computing platforms, on-premise software and cloud-based services. This fragmentation into 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, and make it easy for third-party data mining, analytics, and artificial intelligence (AI) applications to access that information.

Cloud infrastructure giants such as Amazon Web Services (AWS) and Microsoft Azure offers its own integrated cloud storage, but locks customers into their broader ecosystems. Meanwhile, Snowflake’s cloud storage is compatible with AWS, Azure and other cloud platforms — making it an ideal choice for businesses with multi-cloud configurations. It also charges flexible fees based on usage, rather than locking its customers into persistent subscriptions.

Clearly, there is a high demand for Snowflake’s services. Its revenue grew 124% in fiscal 2021 and rose 106% in fiscal 2022 (which ended in January 2022) as its net income retention rate increased from 168% to 178%. These dizzying growth rates have drawn a bull run, and the buying frenzy in hypergrowth and meme stocks since late 2021 has amplified those gains.

Why did Snowflake’s stock crash?

In June 2022, Snowflake’s then-CEO Frank Slootman claimed that the company’s product revenue (which made up most of the top line) would reach $10 billion in fiscal 2029. To achieve this ambitious goal, Snowflake should have grown 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. *Analyst estimates (Yahoo! Finance).

Like many other cloud-based software companies, Snowflake’s growth cooled and retention rates fell as headwinds led many of its customers to rein in spending. Fierce competition from AWS’s Redshift, Azure’s Synapse and similar start-ups like Databricks could exacerbate that pressure and limit pricing power.

To reach $10 billion in product revenue, Snowflake would need to grow at a 30% CAGR from fiscal 2024 to fiscal 2029. Snowflake has not yet formally withdrawn from this long-term goal, but the unexpected retirement of Slootman earlier this year pick up some tomatoes. flags. Analysts expect its revenue to grow at a CAGR of 24% from FY2024 to FY2027.

Why Could Snowflake’s Stock Go Parabolic?

Snowflake’s revenue growth is cooling, but adjusted gross product, adjusted operating margins, and adjusted free cash flow (FCF) are all fairly stable.

Data source: Snowflake.

The company also turned profitable on a non-gaap (adjusted) basis in fiscal 2022 with 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, but increases by 57% in fiscal 2026 as the macro environment gradually improves.

Snowflake’s near-term outlook looks murky, but its stock now trades at just 9 times next year’s sales. In comparison, it trades at 59 times fiscal 2023 sales, when it hit its all-time high in November 2021. However, the company is still poised to benefit from the secular expansion of the AI ​​market as companies put more data into analytics and AI applications.

I previously said I wouldn’t touch Snowflake stock until it revised its IPO price, but now it’s trading below that level. Just as investors were too bullish in 2021, they are now too bearish – and Snowflake could easily surprise the market next year as growth and retention rates stabilize again. So it could be a great stock to buy before interest rates fall and investors turn to higher-growth tech plays again. That’s probably why Berkshire Hathaway hasn’t sold the stock yet.