The stock market is off to a dismal start to the first half of 2022. The S&P 500 is down about 20% so far this year. Meanwhile, the Nasdaq Composite is down a staggering 29% over that time.
Shares of Berkshire Hathaway, down about 7% this year, have significantly outperformed the broader market, but given the current market stress, Warren Buffett’s company has suffered huge losses in its portfolio. Snowflake (SNOW 3.93%) and StoneCo (STNE 0.91%) are the two biggest losers in Berkshire’s portfolio, but risk-tolerant investors can actually reap big gains from these troubled companies. Here’s why betting on these growth stocks is worth it.
The ability to store and analyze data through the cloud is critical to business and organizational success. In most cases, having broader information leads to superior insight and data-driven decisions. Unfortunately, cloud infrastructure providers cannot easily get the full picture and prevent sharing of information about their respective services. This is where snowflakes come in.
Cloud software specialists provide data warehousing services that instantly combine, store and analyze otherwise siloed information. In the midst of digital transformation trends and the explosion of new data that is being created, the ability to analyze, take action and automate services based on the most relevant information available has been the key to success for many organizations. It will only become more important to larger companies and institutions.
At its peak, Snowflake stock traded as high as $405, making it one of the best-performing stocks in Berkshire’s portfolio at one point. However, the company’s valuation has plummeted as the broader market comes under pressure and investors have pulled out of growth-dependent software stocks. Shares are now down 57% through 2022, and are down 65% from their peak.
With the Federal Reserve raising interest rates sharply in response to rising inflation, and Snowflake still trading at a growth-linked valuation, it’s not hard to see why the stock has fallen out of favor. On the other hand, the important services provided by data specialists have very strong long-term demand prospects. Patient investors can reap huge gains from this shabby tech leader.
2. Stone Company
As bad as the U.S. has been lately, inflationary pressures are more acute in some other parts of the world. Brazil has been hit particularly hard, and combined with a relatively weak economic recovery following the coronavirus pandemic, the challenging environment has created significant headwinds for the country’s growth-dependent fintech and e-commerce companies.
StoneCo is a Brazil-based fintech company that provides payment processing services and previously had a promising SME lending business. The company’s lending business has struggled as business failures triggered by the pandemic and new government guidelines introduced by Brazilian regulators have changed the overall perception of the company.
Faced with these challenges, StoneCo expects to make significant write-downs on its debt portfolio, which has an uncertain outlook as new borrowings are currently on hold. The stock is down about 54% so far this year and is down about 92% from its all-time high in early 2021.
Despite the company’s massive losses on its lending business, StoneCo is still growing sales at an attractive rate and delivering solid gains, and with a market value of about $2.4 billion, it appears to be cheaply valued.
The company’s payment processing business continued to perform encouragingly, and the company’s overall performance in the first quarter was quite strong. The fintech service provider’s active payments customer base grew by about 112% year-over-year to about 1.92 million, and its total revenue rose 139% year-over-year — hardly a number that suggests fintech is in it.
StoneCo may never revisit the valuation highs it hit last year, but the stock has attractive upside potential at current prices.