Warren Buffett has a knack for selecting nice shares. Below his management, Berkshire Hathaway has constructed an funding portfolio value over $308 billion, and lots of shares in that portfolio have at the least doubled in worth, together with Apple, American Categorical, and Coca-Cola.

MoffettNathanson analyst Sterling Auty believes one other firm will quickly be part of that record. Berkshire invested $735 million in Snowflake (SNOW -2.38%) at its IPO worth of $120 per share in September 2020. Auty has a 12-month worth goal of $242 per share on Snowflake, which suggests 76% upside from its present worth (and roughly 102% upside from Berkshire’s value foundation).

Is it time to purchase this Buffett inventory?

Snowflake helps companies harness the ability in huge information

Firms depend upon an ever-growing variety of digital applied sciences that create great quantities of information each day. However that information is usually caught in disparate techniques, making it tough for organizations to derive worth from it. Snowflake goals to unravel that drawback with its Knowledge Cloud.

The Knowledge Cloud integrates a number of workloads which have historically required quite a few level merchandise, permitting companies to ingest, retailer, and analyze the info unfold throughout their IT ecosystems. The platform additionally helps collaboration by facilitating the safe sharing of information, and it helps information science by facilitating that transformation of information to be used instances like machine studying and superior statistical evaluation. Moreover, the Powered by Snowflake program permits organizations to construct and function data-driven functions within the Knowledge Cloud.

Suffice it to say Snowflake gives a feature-packed platform, and no different product in the marketplace offers the identical performance. However prospects additionally profit from its infrastructure-neutral design. The Knowledge Cloud runs throughout all three main public clouds — Amazon Internet Providers, Microsoft Azure, and Alphabet‘s Google Cloud Platform — giving prospects the liberty to work with the cloud vendor (or distributors) of their selecting.

Snowflake is rising like wildfire

Snowflake tailors its Knowledge Cloud to particular industries. For example, the corporate launched the Telecom Knowledge Cloud earlier this yr, constructing on different vertical-specific merchandise for retailers, advertisers, and monetary companies suppliers. These tailor-made merchandise pair the performance of the Snowflake platform with industry-specific associate options and datasets, accelerating time to worth for patrons. That go-to-market technique is extremely efficient.

Snowflake’s buyer depend climbed 31% to 7,828 within the fourth quarter of fiscal 2023 (ended Jan. 31, 2023), and the corporate reported a income retention charge of 158%, which means the common buyer spent 58% extra over the previous yr. Only a few corporations ever obtain a income retention charge that top, which speaks to the worth the Knowledge Cloud creates for patrons.

On that notice, full-year income rose 69% to $2.1 billion, and the corporate generated free money stream (FCF) of $496 million, up sixfold from the prior yr. That represents a stable FCF margin of 24%. These outcomes are significantly spectacular given the difficult financial surroundings.

Trying forward, administration expects product income to succeed in $10 billion by fiscal 2029, which suggests income progress of about 30% yearly over the following six years. The corporate can be focusing on a FCF margin of 25%, which suggests FCF of $2.5 billion in fiscal 2029.

The funding thesis is obvious, however the inventory is expensive

The funding thesis is easy: Snowflake helps corporations use huge information to construct functions and make knowledgeable choices, and companies that use information successfully stand to realize a aggressive benefit over their friends. Moreover, its cloud platform improves operational effectivity by consolidating a wide range of workloads, whereas eliminating the necessity to handle the underlying infrastructure. That places Snowflake in entrance of a $248 billion addressable market, in line with administration.

Nevertheless, shares at present commerce at 21.4 occasions gross sales. That could be a huge low cost to the historic common of 75.3 occasions gross sales, however it’s removed from low-cost. Snowflake inventory is down 65% from its excessive, however its present valuation leaves loads of room for additional share-price declines, particularly within the occasion of a recession. For that purpose, risk-averse buyers ought to steer clear, however risk-tolerant buyers ought to contemplate shopping for a small place on this Buffett inventory at present.

As a remaining caveat, buyers ought to by no means lean too closely on Wall Road’s worth targets. The percentages of a 76% return over the following yr are distant at finest. Traders that purchase the inventory ought to be ready to carry for at the least three to 5 years.