Snowflake’s share price is rising. Should I buy this Warren Buffett stock now?

Warren Buffett-backed cloud computing company Snowflake just saw its share price rise 10%. Edward Sheldon looks at whether he should buy the stock now.

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When I last covered Warren Buffett-owned cloud computing stock Snowflake (NYSE: SNOW) around a year ago, I said that I was going to leave it on my watchlist instead of buying it. In hindsight, that was a wise move, as over the next six months, Snowflake’s share price fell by around 50%.

Recently however, Snowflake’s share price has been moving up again. Today, it’s up more than 10%. So, what’s behind this big share price jump? And should I pull the trigger and buy this Buffett-owned tech stock for my portfolio?

Why Snowflake’s share price just popped

The reason Snowflake’s share price has jumped today is that the company’s third-quarter fiscal 2022 results, posted last night, were very strong and ahead of Wall Street’s expectations.

For the quarter ended 31 October, revenue came in at $334.4m, up 110% year-on-year and well ahead of the consensus forecast of $305.6m. Meanwhile, remaining performance obligations – which is deferred revenue plus the backlog – were $1.8bn, up 94% year-on-year.

During the period, Snowflake managed to grow its customer base by a healthy amount. At 31 October, the group had 5,416 total customers and 148 customers with trailing 12-month product revenue greater than $1m. By contrast, at the end of Q2, it had 4,990 total customers, and 116 customers with revenue over $1m.

Snowflake saw momentum accelerate in Q3,” commented CEO and Chairman Frank Slootman. “Our vertical industry focus is an important evolution of our selling motion and Snowflake continues to see broad industry adoption,” he added.

What the market really liked here was the Q4 guidance. Looking ahead, Snowflake expects product revenue for Q4 of between $345m and $350m. That would represent growth of 94% to 96%. Going into the results, analysts had been expecting product revenue of around $316m for the fourth quarter. So, this guidance was well above estimates.

The upbeat guide for Q4 product revenue helps illustrate that the trends in the business are durable and why Snowflake remains one of the really unique hyper-growth stories in software,” said analysts at Evercore.

Should I buy this Buffett stock now?

Snowflake is a really interesting company, in my view. One thing that stands out to me is the growth the company is generating. For the 2022 fiscal year (ending 31 January 2022), product revenue is expected to grow by around 103%-104%. This is after the group posted product revenue growth of 116% last fiscal year. This level of growth suggests to me that Snowflake has a very good offering.

Another thing that stands out is the investor base. Warren Buffett isn’t the only big-name investor here. Some names in the top 10 shareholder list include BlackRock, Vanguard, Morgan Stanley, Altimeter Capital, Sequoia, and Tiger Global. These are some of the biggest players in the investment world, which suggests that this company is the real deal.

I still have a few concerns over the valuation, however. At the current share price, Snowflake has a market cap of around $102bn. This means the forward-looking price-to-sales ratio (there’s no price-to-earnings ratio as it’s not yet profitable) is in the 80s. That’s very high. At that valuation, I’d expect the stock to be very volatile at times.

Given the high valuation, I’m going to keep Snowflake on my watchlist for now. At present, the stock is just too expensive for me. That said, if we see another big pullback here, I may take a small position.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has 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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