Akre Capital Management recently disclosed its 13F portfolio updates for the second quarter of 2022, which ended on June 30.
Chuck Akre (Trades, Portfolio) founded Akre Capital Management in 1989 and serves as the chairman and chief investment officer of the firm. The portfolio managers of the Akre Focus Fund are John Neff and Chris Cerrone. Headquartered in Middleburg, Virginia, the firm’s portfolio management team invests in a small number of quality businesses run by good managers who reinvest their free cash flow wisely. These are the three components that make up the unique “three-legged stool” investment philosophy which the firm is known for sticking closely to.
According to the firm’s second-quarter 13F report, it only made one new buy during the period: Snowflake Inc. (SNOW, Financial), a cloud computing company that also counts Warren Buffett (Trades, Portfolio)’s 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 include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Snowflake’s stock price is down 33% since it first went public, which was when Berkshire reported its holding. Could the stock be a value opportunity now that market sentiment is down and the post-initial public offering selloff is over?
Akre Capital buys Snowflake
As of the end of the second quarter, Akre Capital reported a position of 1,000,000 shares in Snowflake, giving the stock a 1.11% equity portfolio weight and making up 0.31% of the company's total shares outstanding. During the quarter, Snowflake’s shares changed hands for an average price of $159.54.
Other guru investors with holdings in Snowflake include Buffett, Frank Sands (Trades, Portfolio), Baillie Gifford (Trades, Portfolio), Chase Coleman (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies. Gurus have been mostly bullish on the stock throughout its brief trading history:
A leader in cloud data
Snowflake’s big draws for customers and investors alike are that its data warehousing offering is cloud native and that all of Snowflake’s components run on Alphabet’s (GOOG) (GOOGL) Google Cloud, Microsoft’s (MSFT) Azure and Amazon’s (AMZN) Amazon Web Services.
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 customer can set up and manage Snowflake without IT assistance. Processes like auto-scaling, software updates and increasing 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 thus spend) more than they intended to, but there is undeniably an advantage here over fixed capacity, which requires additional hardware, upgrades and restructuring to add capacity.
Snowflake’s top competitors include Amazon’s Redshift and Alphabet’s BigQuery. Snowflake derives competitive advantages from instant scaling and more automated maintenance, though it does lose out on the more natural integration of cybersecurity solutions that some of the big tech giants offer.
Snowflake’s outlook
Snowflake is still focusing on growth over profitability, so while its revenue per share has a three-year growth rate of 115.5%, earnings per share without non-recurring items has a three-year growth rate of -39.6%. The company 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%. That growth rate has become a lot 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-sales ratio of 36.94, but if it can continue the trend of doubling its revenue and reach profitability, then the valuation multiples will naturally decrease to an acceptable level. Snowflake predicts that its revenue could grow to $10 billion by 2029 compared to the $1.2 billion reported in full fiscal 2022.
The company has a net revenue retention rate of 174%, meaning customers are not only staying with Snowflake but also increasing 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 trailing 12-month revenue greater than $1 million rising to 206, up from 104.
See also
Akre Capital’s other significant trades in the quarter included selling out of its Ansys Inc. (ANSS, Financial) position, reducing CoStar Group Inc. (CSGP, Financial) and Alarm.com Holdings Inc. (ALRM, Financial) and adding to Salesforce Inc. (CRM, Financial). You can view the full portfolio update as well as previous trades here.
As of the quarter’s end, the firm’s top holdings were Mastercard Inc. (MA, 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 firm was most invested in financial services, real estate and consumer cyclical stocks. Technology is a small but growing portion of the asset allocations.
