When you think of 91 year old Warren Buffett’s stock picks, old stodgy companies with wide moats that spit off massive amounts of cash come to mind. From railways to insurance, the laundry list of market-beating companies Buffett owns through his holding company Berkshire Hathaway is the stuff of legend.
But one sector Buffett has famously avoided up until the last few years is technology, and software in particular. That’s why Berkshire’s investment in a monster software company came as such a surprise to keen observers of the Oracle of Omaha when it was disclosed.
So what software company does Buffett’s Berkshire have almost $1.5 billion tied up in?
What Makes This Software Company So Different
As you can imagine, if Berkshire made such a large bet on a software company, it’s got to have something special going for it, and it does.
Snowflake isn’t an ordinary SaaS firm that charges monthly fees to enterprises. Instead, sales are a function of consumption, so revenue is – for the most part – recognized when consumption occurs. And that consumption is what makes Snowflake special.
The key statistic for investors to pay attention to is an obscure term, called Net Revenue Retention Rate. The NRRR is a key performance metric that lets investors know how much money a company makes from each cohort of customers from one accounting period to another.
Most companies experience churn from one period to the next, meaning they lose some customers for various reasons. NRRR is a measure of how much more a customer spends from one period to the next, and for Snowflake that figure is 174%.
To put this in perspective, Snowflake is ranked #1 on this key metric versus all other companies we could identify in our research.
In short, customers love Snowflake so much that they keep spending more and if there’s one thing Buffett loves it’s companies that delight their customers.
Snowflake By The Numbers
Growth stocks have taken a beating in the first couple of quarters of 2022 and Snowflake got caught up in the deluge. But you would never guess it by examining the numbers.
Here’s a snapshot of the companies quarterly growth numbers year over year:
- 2020 Q2: 149.0%
- 2020 Q3: 120.7%
- 2020 Q4: 118.6%
- 2021 Q1: 117.2%
- 2021 Q2: 110.4%
- 2021 Q3: 104.4%
- 2021 Q4: 109.5%
- 2022 Q1: 101.5%
- 2022 Q2: 84.5%
That stellar growth is forecast to continue.
Revenues over the next few years annually are expected to grow as follows:
- 2023: $2.0 billion
- 2024: $3.1 billion
- 2025: $4.4 billion
- 2026: $6.3 billion
- 2027: $8.4 billion
Growing at such a rapid clip means that, even with the stock down by almost 20% year to date, it is still trading at a premium. The price relative to last twelve months sales is an eye-popping 82.4x. And while that’s sufficiently high to steer clear of usually, the forward-looking math needs to be considered carefully here.
Snowflake is trading at 20x its 5-year revenue projections, which may end up being highly conservative if the net revenue retention rate keeps rising quarterly as it has been.
The company is not cheap, for sure, but it’s about as cheap as it has been since debuting as a public company. If the fundamentals continue to validate the thesis that customers are truly delighted, and spending more from one quarter to the next, expect Snowflake to trade at an even higher premium when the tide turns and growth stocks are in vogue again.