Snowflake (NYSE:SNOW) shares jumped almost 16% during trading last Thursday due to better than expected results. With the cloud computing data company being pointed to as an example of the future, I’m interested to see whether it merits an investment right now. After all, legendary investor Warren Buffett holds the shares via his company Berkshire Hathaway.
A young company with potential value
Snowflake is an interesting business. The name reportedly comes from the founder’s passion for winter snow sports and is unrelated to the actual business operations. The company allows users to store data in the cloud, as well as analyse the data stored there. This becomes a powerful tool, especially in the business-to-business sales space.
The firm has seen rapid growth since being formed back in 2012. It went public in the US in late 2020 at $120 and rallied strongly in the first couple of months of trading. Buffett bought at this $120 level with his Snowflake shares worth $730m at the time. With the current share price at $345, he has almost tripled his original investment amount.
In my opinion, his decision to invest in Snowflake does add weight to the thinking that the company has good value. His investing approach has been to find companies with good long-term value. He isn’t the type of person who puts in some money with the aim of selling after a few months. So if he’s holding Snowflake shares for years to come, it points to there being more upside value to be had.
Financials offer risk and reward
Growth was seen in the recent Q3 results, the main reason why Snowflake shares gained so much attention late last week. Revenue was up 110% year-on-year at $334.4m. Given the nature of the cloud storage platform, Snowflake really wants to grow the customer base. Once you’re on the cloud, it makes the customer much stickier and likely to stay with Snowflake for the future.
To this end, the results showed a strong customer base of 5,416 accounts. Some 148 customers generated revenue greater than $1m over the past year. If customer growth stays strong then I think Snowflake could do very well.
One risk I see is that the business is generating losses. It’s a classic model of a technology company that’s losing money now but has the vision to hopefully break even and become profitable in years to come. Snowflake shares reflect this future outlook. Yet the risk is that it doesn’t grow to scale and reach profitability. If this is the case, then the shares are clearly overvalued at current levels.
Considering value in Snowflake shares
Snowflake shares might only be up 16% since the start of 2021, but they’re up almost 300% since the IPO last autumn. I do think that the shares are a little expensive, given the financials of the business. Yet having Buffett on board is a powerful thing. Given his investment strategy, I’d be happy to buy some shares now to hold for long-term upside and am thinking about doing so.
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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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