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This Warren Buffett stock is down 68% and I’m thinking about buying it

Warren Buffett at a Berkshire Hathaway AGM

Warren Buffett owns plenty of well-known blue-chip stocks. Coca-Cola, Apple, and Kraft Heinz are some examples. However, he also owns quite a few lesser-known stocks that aren’t on every investor’s radar.

Here, I’m going to highlight one of these latter stocks. This Buffett choice has come down a long way recently and, as a result, I’m considering buying it for my portfolio.

Buffett owns this tech stock

The stock I’m referring to is Snowflake (NYSE: SNOW). It’s a US technology company that offers cloud-based data storage and analytics services via a Software-as-a-Service (SaaS) model. Currently, it has over 6,800 customers across industries such as financial services, healthcare, manufacturing, technology and retail. And around 250 of these are ‘$1m+’ customers.

As for Buffett’s holding, regulatory filings show that at 30 June, his investment company, Berkshire Hathaway, owned 6,125,376 Snowflake shares. At today’s share price ($129), that equates to around $790m worth of stock.

Why I’m considering buying Snowflake stock

There are a few reasons Snowflake stock looks interesting to me right now. One is that the stock is currently around 70% off its highs. That’s a huge decline.

Now that doesn’t automatically make it a buy. However, if a high-quality growth stock has fallen by that magnitude, it’s often worth taking a closer look. Particularly if the stock is owned by the greatest investor of all time, aka ‘The Oracle of Omaha’.

Another is that the company continues to grow at a rapid clip. In its latest results for the quarter ended 31 July, product revenue came in at $466.3m, up 83% year over year. Encouragingly, net revenue retention rate for the period was 171%, indicating that existing customers are signing up for more of the company’s services.

A third reason is there’s plenty of room for growth. According to Grand View Research, the global cloud computing market is expected to be worth USD $1.6trn by 2030, registering a compound annual growth rate (CAGR) of 15.7% between now and then. This market growth should provide strong tailwinds for the company going forward.

Finally, the company appears to be on the cusp of delivering consistent profits. This financial year, Wall Street analysts expect the group to generate net profit of $56.2m. Meanwhile, next year, they expect a net profit of $153m. Regular profits could make the stock more appealing to institutional investors.

High valuation

Now it’s worth pointing out that even after its huge share price fall, this Buffett stock is still very expensive. If we use next year’s earnings forecast of $0.436, the forward-looking price-to-earnings (P/E) ratio here is just under 300. Meanwhile, the forward-looking price-to-sales ratio is about 13. The high valuation adds risk.

Given this valuation, if I was to buy Snowflake stock, I wouldn’t make it a big position in my portfolio. I would take a small position as a more speculative holding.

Right now, I still haven’t decided whether I want to pull the trigger and buy. However, I certainly think this Buffett stock looks interesting at current levels.

The post This Warren Buffett stock is down 68% and I’m thinking about buying it appeared first on The Motley Fool UK.

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Edward Sheldon has positions in Apple. The Motley Fool UK has recommended Apple and Snowflake Inc. 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.