When Snowflake (SNOW 2.31%) When it went public in September 2020, the cloud-based data warehousing company attracted a lot of attention for two main reasons. First, it grew like a weed. Second, Warren Buffett’s Berkshire-Hathaway — which rarely invests in hypergrowth technology stocks — purchased 6.13 million shares in its IPO. As of this writing, it still holds that entire position, which represents 0.2% of its portfolio.

Berkshire’s decision to hold on to Snowflake is interesting because it is now trading below its IPO price of $120. It more than doubled in its first trade to trade at $245. On November 16, 2021, it rose to an all-time high of $401.89, but is now trading at $115. Therefore, the value of Berkshire’s Snowflake stake rose from $736 million to $2.46 billion before shrinking back to about $705 million.

Image source: Getty Images.

Like many other hypergrowth tech stocks, Snowflake lost its luster as its revenue growth cooled and rising interest rates depressed its valuations. However, I believe Snowflake could go parabolic in 2024 and beyond if its growth rates stabilize.

Why did Snowflake shares initially skyrocket?

Large organizations often store their data on a variety of computing platforms, on-premises software, and cloud-based services. This fragmentation across different silos makes it difficult to make data-driven decisions. Snowflake’s cloud-based data warehouses pull all data into a central location, cleanse it, and make this information easy to access for third-party data mining, analytics, and AI applications.

Cloud infrastructure giants like Amazon Web Services (AWS) and Microsoft Azure offers its own integrated cloud warehouses but ties its customers to its broader ecosystems. Snowflake’s cloud warehouse, on the other hand, is compatible with AWS, Azure, and other cloud platforms – making it an ideal choice for companies with multi-cloud configurations. It also charges flexible, usage-based fees rather than locking its customers into fixed subscriptions.

There is clearly a lot of demand for Snowflake’s services. Revenue grew 124% in fiscal 2021 and 106% in fiscal 2022 (which ended in January 2022), while the net revenue retention rate rose from 168% to 178%. These dizzying growth rates attracted a mass panic, and the buying frenzy in hypergrowth and meme stocks in late 2021 amplified these gains.

Why did Snowflake stock collapse?

In June 2022, Snowflake’s then-CEO Frank Slootman claimed that the company’s product revenue (which accounted for the majority of its revenue) would reach $10 billion in fiscal year 2029. To achieve this ambitious goal, Snowflake would have had to grow its product revenue at a compound annual growth rate (CAGR) of 36% from 2022 to 2029. But that’s actually what happened.

Data source: Snowflake. *Analyst estimates (Yahoo! Finance).

Like many other cloud-based software companies, Snowflake’s growth slowed and retention rates fell as macroeconomic headwinds forced many of its customers to rein in spending. Strong competition from AWS Redshift, Azure Synapse and similar startups like Databricks could add to these pressures and limit the company’s pricing power.

To reach $10 billion in product revenue, Snowflake would need to achieve a 30% compound annual growth rate from 2024 to 2029. Snowflake has not officially withdrawn this long-term goal, but Slootman’s unexpected resignation earlier this year raises some warning signs. Analysts expect revenue to grow at a 24% compound annual growth rate from 2024 to 2027.

Why was Snowflake stock able to rise parabolically?

Snowflake’s revenue growth is cooling, but adjusted gross product margins, adjusted operating margins, and adjusted free cash flow (FCF) margins are all fairly stable.

Data source: Snowflake.

The company also became profitable on a non-GAAP (adjusted) basis in fiscal 2022, with earnings per share (EPS) of $0.01. This figure increased to $0.25 in fiscal 2023 and $0.98 in fiscal 2024. Analysts expect non-GAAP EPS to decline 36% in fiscal 2025 as growth slows, but to increase 57% in fiscal 2026 as the macroeconomic environment gradually improves.

Snowflake’s near-term prospects seem bleak, but the stock currently trades at just 9 times next year’s revenue. In comparison, it traded at 59 times its fiscal 2023 revenue when it hit its record high in November 2021. Yet the company is still poised to benefit from the secular expansion of the AI ​​market as companies put more data into analytics and AI apps.

I’ve previously said I wouldn’t touch Snowflake stock until it gets back to its IPO price, but now it’s trading below that level. Just as investors were too optimistic in 2021, they’re too pessimistic now – and Snowflake could easily surprise the market next year if its growth and retention rates stabilize again. Therefore, it could be a great stock to buy before interest rates drop and investors turn back to higher-growth tech stocks. That’s probably why Berkshire Hathaway hasn’t sold the stock yet.