1 Warren Buffett Stock That Could Go Parabolic in 2024 and Beyond – The Motley Fool

when Snowflake (snow 2.31%) This cloud-based data warehouse company, which went public in September 2020, attracted a lot of attention for two main reasons. First, it was growing like a weed. Second, it was bought by Warren Buffett. Berkshire Hathaway The firm, which rarely invests in high-growth tech stocks, acquired 6.13 million shares at the IPO, and as of writing it holds all of those shares, which make up 0.2% of the portfolio.

Berkshire’s decision to hang on to its Snowflake stake is interesting because the company’s stock is currently trading below its IPO price of $120. It more than doubled to $245 in its first trade. It soared to an all-time high of $401.89 on November 16, 2021, but is now trading at $115. Thus, the value of Berkshire’s Snowflake stake grew from $736 million to $2.46 billion before shrinking to about $705 million.

Like many other high-growth tech stocks, Snowflake has lost some luster as its earnings growth slowed and rising interest rates have put pressure on its valuation. But I believe Snowflake has the potential to soar beyond 2024 as its growth rate stabilizes.

Why did Snowflake’s stock price initially soar?

Large organizations often store all their data across a variety of computing platforms, on-site software, and cloud-based services. Data fragmentation across different silos makes it difficult to make data-driven decisions. Snowflake’s cloud-based data warehouse collects and organizes all your data in a centralized location, making the information more accessible to third-party data mining, analytics, and artificial intelligence (AI) apps.

Cloud infrastructure giant Amazon Web services (AWS) and Microsoft While Azure offers its own integrated cloud warehouse, it locks customers into Azure’s broader ecosystem, whereas Snowflake’s cloud warehouse is compatible with AWS, Azure and other cloud platforms, making it an ideal choice for multi-cloud enterprises, and it offers flexible usage-based pricing rather than locking customers into fixed subscriptions.

Demand for Snowflake’s services is clearly strong: The company’s revenue soared 124% in fiscal 2021 and grew 106% in fiscal 2022 (ending January 2022) as net revenue retention rose from 168% to 178%. These dizzying growth rates attracted a flock of bulls, whose gains were amplified by a buying frenzy in high-growth and meme stocks in the second half of 2021.

Why did Snowflake’s stock price crash?

In June 2022, Snowflake’s then-CEO Frank Slootman claimed the company’s product revenue (which makes up the majority of its top line) would reach $10 billion in fiscal year 2029. To reach this ambitious goal, Snowflake needed to grow its product revenue at a compound annual growth rate (CAGR) of 36% from fiscal year 2022 to fiscal year 2029. But that’s what happened.

Data source: Snowflake. *Analyst estimates (Yahoo! Finance).

Like many other cloud-based software companies, Snowflake’s growth has slowed and customer retention has declined as macroeconomic headwinds have led many customers to curb spending. Intense competition from AWS’ Redshift, Azure’s Synapse, and similar startups like Databricks could further increase that pressure and limit its pricing power.

To hit $10 billion in product revenue, Snowflake needs to grow at a 30% compound annual growth rate from fiscal 2024 to fiscal 2029. Snowflake hasn’t formally backed away from this long-term goal yet, but Slootman’s unexpected departure earlier this year raised some red flags. Analysts expect the company’s revenue to grow at a 24% compound annual growth rate from fiscal 2024 to fiscal 2027.

Why is Snowflake’s stock price soaring?

Snowflake’s revenue growth has slowed, but its adjusted gross product margins, adjusted operating margins, and adjusted free cash flow (FCF) margins have all remained fairly stable.

Data source: Snowflake.

The company also turned profitable on a non-GAAP (adjusted) basis with earnings per share (EPS) of $0.01 in fiscal 2022, rising to $0.25 in fiscal 2023 and $0.98 in fiscal 2024. Analysts expect non-GAAP EPS to decline 36% in fiscal 2025 due to slowing growth, but increase 57% in fiscal 2026 as the macro environment gradually improves.

Snowflake’s near-term outlook is unclear, with the company’s shares currently trading at just nine times next year’s sales. By comparison, at its all-time high in November 2021, it was trading at 59 times fiscal 2023 sales. But the company is still poised to benefit from a long-term expansion of the AI ​​market as companies put more data into analytics and AI apps.

I previously said I would hold off on Snowflake shares until they reprice their IPO, but they are now trading below that level. Just as investors were too bullish on 2021, they are now too bearish. Snowflake could easily surprise the market over the next year as growth and retention rates stabilize again. Therefore, Snowflake may be a great stock to buy before interest rates fall and investors turn to high-growth tech stocks again. Perhaps that’s why Berkshire Hathaway hasn’t sold the stock yet.