Snowflake Gains Another Guru I
Akre Capital Management recently unveiled updates to its 13F portfolio for the second quarter of 2022, which ended June 30.
Chuck Akre (Trades, Portfolio) founded Akre Capital Management in 1989 and serves as the company’s President and Chief Investment Officer. The Akre Focus Fund’s portfolio managers are John Neff and Chris Cerrone. Based in Middleburg, Va., the firm’s portfolio management team invests in a small number of quality companies run by good managers who wisely reinvest their free cash flow. These are the three elements that make up the unique “three-legged stool” investment philosophy to which the firm is known to adhere closely.
According to the company’s second quarter 13F report, it made only one new purchase during the period: Snowflake Inc. (SNOW, Financial), a cloud computing company that also has
warren buffet (Trades, Portfolio) Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) among its investors.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They only include an overview of long positions in US-listed stocks and US certificates of deposit at the end of the quarter. They do not include short positions, international non-ADR holdings or other types of securities. However, even this limited repository can provide valuable information.
Snowflake’s share price has fallen 33% since its initial public offering, when Berkshire announced its participation. Could the stock be a value opportunity now that market sentiment is down and the post-IPO sell-off is over?
Akre Capital acquires Snowflake
At the end of the second quarter, Akre Capital declared a position of 1,000,000 shares in Snowflake, giving the stock an equity portfolio weighting of 1.11% and representing 0.31% of total shares. in circulation of the company. During the quarter, shares of Snowflake changed hands for an average price of $159.54.
Other guru investors with stakes in Snowflake include Buffett,
Frank Sands (Businesses, Portfolio),
Baillie Gifford (Businesses, Portfolio),
Chase Coleman (Businesses, Portfolio) and
Jim Simons (Businesses, Portfolio)’ Renaissance Technologies. Gurus have been overwhelmingly bullish on the stock throughout its brief trading history:
A leader in cloud data
Snowflake’s big selling points for customers and investors are that its data warehousing offering is cloud-native and all Snowflake components run on Alphabet’s Google Cloud (GOOG) (GOOGL), Microsoft’s Azure ( MSFT) and Amazon Web Services from Amazon (AMZN).
This means it can be integrated into a user’s existing cloud infrastructure. Users can load data into the cloud without converting or transforming it into a fixed schema, allowing structured and semi-structured data to be combined for analysis.
Snowflake also requires almost no administration. Most customers can configure and manage Snowflake without IT support. Processes such as autoscaling, software updates, and growing clusters and virtual warehouses are automated.
Another advantage of Snowflake is that it offers unlimited compute sizes and storage. Some customers complain that this makes it easier to use (and therefore expense) more than expected, but there is definitely an advantage here over fixed capacity, which requires additional hardware, upgrades, and refactoring to add capacity.
Snowflake’s main competitors are Amazon’s Redshift and Alphabet’s BigQuery. Snowflake derives competitive advantages from instant scaling and more automated maintenance, though it loses the more natural integration of cybersecurity solutions that some of the big tech giants offer.
Snowflake is still focused on growth rather than profitability, while its revenue per share has a three-year growth rate of 115.5%, earnings per share without one-time items has a growth rate of over three years of -39.6%. The business is still not profitable.
According to Allied Market Research, the global data warehousing market is expected to reach a value of $51.18 billion by 2028, growing at a CAGR of 10.7%. This growth rate has become much less attractive due to high inflation, which has played a key role in compressing Snowflake’s valuation multiples.
The stock still looks quite expensive at a price-to-sales ratio of 36.94, but if it can continue the trend of doubling earnings and achieving profitability, then valuation multiples will naturally decline to an acceptable level. Snowflake forecasts revenue could reach $10 billion by 2029, up from $1.2 billion in fiscal 2022.
The company has a 174% net revenue retention rate, which means customers not only stay with Snowflake, but also increase their spending. Snowflake is also gaining new customers; in the first quarter of fiscal 2023, the company reported 6,322 total customers, compared to 4,532 total customers a year ago, with the number of customers contributing to 12-month revenue of more than 1 million dollars rising to 206 from 104.
Akre Capital’s other significant transactions during the quarter included the sale of its company Ansys Inc. (ANSS, Financial), reducing CoStar Group Inc. (CSGP, Financial) and Alarm.com Holdings Inc. (ALARM, Financial) and adding to Salesforce Inc. (RCMP, Financial). You can see the full wallet update as well as previous transactions here.
At the end of the quarter, the company’s top holdings were Mastercard Inc. (MY, Financial) with 14.81% of the equity portfolio, American Tower Corp. (AMT, Financial) with 14.27% and Moody’s Corp. (MCO, financial) with 12.42%.
By sector, the company was most invested in financial services, real estate and cyclical consumer stocks. Technology represents a small but growing share of asset allocations.