Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) is known for its long track record of market-beating returns.
Historically, Buffett has favored reliable blue chip stocks in industries like financials, consumer goods, healthcare, and energy, and he tends to avoid unprofitable, high-growth stocks that investors typically think of as having the potential to go “parabolic.”
However, that doesn’t mean that there aren’t any growth stocks in Buffett’s collection. Here are two that have the potential to skyrocket.
1. A beaten-down luxury stock
Buffett added to his stake in RH (RH), the high-end home furnishings company formerly known as Restoration Hardware, in the third quarter, buying 190,000 shares of RH. That brings Berkshire’s total ownership to 2.36 million, or roughly $580 million.
With the stock down 65% and in the midst of the transition to a diversified luxury brand, Buffett’s third-quarter buy could prove timely, especially as the stock looks cheap at a price-to-earnings ratio of just 9.
RH is facing temporary headwinds as demand for home goods has slowed due to difficult comparisons with the boom during the pandemic, a shift in consumer spending to service-based categories like travel and restaurants, and fears of a recession.
However, RH seems well positioned for a rebound once the economy turns and demand for home goods bounces back. It’s built a unique brand in home furnishings thanks to a marketing approach built around its cavernous galleries and sourcebooks. It’s found success with a unique membership model that offers customers discounts of 20% to 25% on merchandise with a $175 annual fee, which gives it an additional revenue stream and incentivizes customer loyalty from a base of customers with a demonstrated affinity for its products.
RH is also extending its brand beyond home furnishings, launching pilots for restaurants and hotels, and leasing planes and yachts, and it is introducing a streaming service based on architecture and design. Those moves leverage a customer base that’s come to love its aesthetic and will further reinforce the strength of its brand.
Though RH’s growth has slowed this year, the company is still putting up an industry-leading operating margin of 23.6%, showing its competitive advantages and pricing power.
Over the next few years, the stock should benefit from multiple expansions and growing profits, leading the stock to double or triple. If its new businesses take off, the stock could truly go parabolic.
2. A fast-growing tech juggernaut
Snowflake (SNOW), the cloud-based data warehousing giant, is another Berkshire holding, though Buffett’s lieutenants are credited with buying it.
Berkshire currently owns 6.1 million Snowflake shares with a market value of nearly $1 billion, and the stock offers a number of features that investors look for in a potentially parabolic stock. Its price is beaten down, having fallen 66% from its peak last year. The company is growing fast, and it provides its customers with essential tech infrastructure like data storage, processing, and analytics.
In its third-quarter earnings report, Snowflake continued to deliver strong growth in spite of a difficult macro environment for tech stocks.
Revenue jumped 67% to $557 million, and its remaining performance obligations, which is a proxy for the backlog, jumped 66%, showing the company is seeing strong demand. What was also impressive was that Snowflake’s net retention rate was 165%, showing that revenue from existing customers increased 165% over the last four quarters.
Snowflake is able to deliver that kind of growth because its revenue model is usage-based, meaning customers pay for how much they store and analyze.
That gives Snowflake an advantage over some other software stocks that have to worry about upsells and selling new seat licenses that grow business with their existing customer base. It also now has more than 7,000 total customers and 287 customers with more than $1 million, showing it provides significant value for its largest customers.
While Snowflake’s growth is slowing from earlier triple-digit revenue growth rates, its recent growth shows the business is still growing briskly and it is profitable on an adjusted basis.
Snowflake stock is expensive at a run-rate price-to-sales ratio of 20, but with its rapid growth rate, it can easily grow into that multiple. If market sentiment on software stocks shifts and Snowflake is able to maintain its growth rate, the stock looks like a good bet to soar. At its current price, the stock could triple just by retracing its losses over the last year.
— Jeremy Bowman
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Source: The Motley Fool