Akre Capital Management is an investment firm that had $12.49 billion worth of investments in its latest 13F report for the second quarter of 2022, which ended June 30.
Founded by Chuck Akre (Trades, Portfolio) in 1989, the company uses a “three-legged stool” approach to investing this includes identifying businesses that are “extraordinary," which are defined as having great management and strong returns on capital with growth potential for the future.
In the second quarter of 2022, Akre's portfolio managers added to six existing stock positions and purchased one new stock. In this article, we will take a look at two tech stocks Akre Capital Management was buying during the quarter that I believe have strong growth potential. Let's dive in.
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
Akre Capital Management initiated a position in Snowflake (SNOW, Financial) in the second quarter of 2022, during which shares traded at an average price of ~$159, which is 11% cheaper than where the stock trades at the time of writing.
What does Snowflake do?
Snowflake is a leading data warehouse provider. Many enterprises have data in departments that are in “silos” across an organization. However, through the use of a “Data Cloud," they can bring this data together and run machine learning on it to gain new insights. There are many data warehouse providers such as Amazon's (AMZN, Financial) Redshift, Microsoft's (MSFT, Financial) Azure Synapse and Alphabet's (GOOG, Financial)(GOOGL, Financial) Google Big Query. However, Snowflake is optimized for the hybrid cloud, which is a common IT architecture that involves having some elements on site and other parts with a cloud provider or multiple cloud providers. Snowflake is ranked as the number one data warehouse provider by G2 and thus is the gold standard in the industry.
Financials
Snowflake had a blockbuster second quarter and generated revenue of over $497 million, which rose by a blistering 83% year over year. This was driven mainly by product revenue of $466 million, which was also up by 83% year over year.
Remaining performance obligations, which is used by the company to estimate future revenue, popped by 78% year over year to $2.7 billion. The company has a wonderful retention rate of 171%, which means that customers are staying with the company and spending more, which makes sense after they connect and upload all their data to it. In addition, the high RPO shows the upselling and cross-selling strategy is working well.
Earnings per share was $0.01 for the quarter, which beat analyst expectations by $0.02. However, on a GAAP basis, it should be noted that Snowflake did produce a heavy operating loss of over $207.7 million. This was mainly due to large investments into sales and marketing as the company aims to grow aggressively. 
Snowflake has a fortress-like balance sheet with cash, cash equivalents and short-term investments of $3.95 billion compared to total debt of $206 million.
Valuation
Snowflake has been notoriously overvalued since its recent IPO. However, it should be noted it now trades at a forward price-sales ratio of 25, which is cheaper than historic levels that averaged over 90 in 2021. Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) is also an investor in the stock, which is an encouraging sign.
Adobe
Adobe (ADBE, Financial) is a pioneer in the creative software and the intelligent document industry. Akre's firm added to this position in the second quarter of 2022 at an average price of $407.76 per share, which is ~7% more expensive than where the stock trades at the time of writing. Its business reports across two main segments: Digital Media and Digital Experience.
The Digital Media segment makes up over 73% of revenue and includes a variety of gold standard media tools. Examples include Adobe Photoshop, which is used by 90% of the world's creative professionals, as well as the leading video editing software Premiere Pro and Adobe Illustrator for graphic design. This segment also includes the “Document Cloud,” which consists of its various PDF products (as a side note, the company invented the PDF file format in 1993).
The Digital Experience segment is basically the marketing cloud of Adobe. It provides Adobe Analytics, Data Tools and the leading email automation platform used by professionals.
Financials
Adobe reported solid financial results for the second quarter of 2022. Revenue came in at $4.39 billion, which increased by 14% year over year and beat analyst estimates by $39.15 million.
The company also has a spectacular gross margin of ~88%. The operating margin of 36% was much higher than the 23% average for the software industry.
Earnings per share was $2.49 on a GAAP basis, which was in line with analyst estimates. In addition, non-GAAP EPS was $3.35, which beat analyst expectations by $0.04.
The company has a fortress-like balance sheet with $5.3 billion in cash and cash equivalents compared to debt of $3.6 billion.
Valuation
Adobe trades at a price-earnings ratio of 28, which is 27% cheaper than its five-year average.
The GF Value chart indicates a fair value of $619.90, which would make it significantly undervalued at the time of writing.
Final thoughts
Both Adobe and Snowflake are gold standard growth stocks that are poised to ride secular trends across the cloud and digital media industries, respectively. The fact that Akre Capital Management was buying these stocks in the second quarter is an encouraging sign. Overall, I believe both of these names could be good for growth at a reasonable price.
