Why Did Berkshire Buy Snowflake? Early in September 2020, the Snowflake IPO made its blockbuster debut.
Throughout the initial public offering process, Snowflake [SNOW] expected to go public with a $20 billion market capitalization – but when news of Berkshire and other leading investors became public, the company’s shares debuted with a valuation of $70 billion, exceeding the most optimistic of forecasts.
Some analysts considered this as just another example of a bull market frothing at the mouth – especially for SaaS stocks.
In fact, some believe the challenges SNOW faces are quite formidable, such as cloud services providers that have been in the game for much longer that aren’t just going to move over for the new guy in town.
Still others think that SNOW’s valuation is well-deserved as it holds the “pole position” when it comes to data – in analytics and in warehousing. Which thesis is right? And why did Warren Buffett buy Snowflake?
Snowflake Helps Companies Become More Efficient
In today’s world, everything runs on data. Snowflake’s cloud-based storage service, a.k.a. data warehousing-as-a-service, lets companies store data and analyze it using both hardware and software that are housed in the cloud.
Customers can streamline data housed elsewhere directly into Snowflake for one seamless experience. The service can also be used to transform how team share information easing collaboration.
The overall idea behind SNOW is to help corporate companies improve efficiency in computation and storage, which saves both time and dollars for large enterprises.
Prior to its IPO, Snowflake had a billion-dollar valuation – the definition of unicorn status.
Snowflake’s current valuation stands at north of $60 billion signals that investor expectations are sky high for future growth and market penetration.
The company began in 2012 and already has over 3,000 clients – nearly 60 of whom pay $1 million or more annually for services.
Top Venture Capitalists Bet On Snowflake
Buffett and his lieutenants aren’t the only investor throwing their hat into the Snowflake ring.
Top venture capitalists such as Salesforce (CRM) CEO Marc Benioff and GEICO (privately held by Berkshire) CEO Todd Combs think Snowflake is an avalanche of the highest merit.
Buffett and Combs have both invested sharply $570 million and $250 million, respectively. The billionaire investor responsible for Third Point, Dan Loeb, has also joined the club.
Why Did Buffett Buy Snowflake?
Buffett’s investing tactics have long surprised many in the financial world. As a long-standing opponent of tech stock investments, why Snowflake? And why now?
Well, if you evaluate Berkshire’s holdings over the past few years, the fund’s actions, and its public statements, you’ll notice an ever-evolving strategy.
This evolution has resulted in the Snowflake investment. Snowflake is special – it offers many of the aspects Buffett is famous for seeking. We can learn more about Buffett by taking a deeper look into this investment – and more about Snowflake by examining why Buffett likes it.
The Snowflake purchase is merely the most recent evidence of Buffett’s changing approach to investments. He began his investment career as a value investor. Historically, he waited for value to emerge before making a move.
He liked companies trading at low P-to-E ratios – and ideally had had balance sheet cash that rivaled market capitalizations.
Over time, he evolved to put more stock in higher quality companies. This was due in part to his personal net worth and that of Berkshire – as these figures grew larger, the number of good investment opportunities grew smaller.
The types of investments he’d been looking for were beginning to only be seen in small companies or exceedingly special circumstances. These less liquid investments no longer suited Buffett. Another thing is Buffett’s money management style was leaking over into the market as a whole – it virtually erased those special circumstances.
But perhaps the biggest factor in the evolution of Buffett’s trading style is that his value investing wasn’t performing as well as the investments he placed in the “higher quality” companies.
As he’s looked back on his greatest successes, he claims to have realized that something vital – entry price isn’t as important as business quality.
Some of his most infamous failures were due to rock-bottom stock investments – which in a perfect investment world would lead to great returns eventually. But if those weaker investments are in weak industries or the company itself has a poor business model, their low-priced stock means nothing.
Snowflake perfectly fits Buffett’s new approach. Remember when Buffett famously passed on investing in Google (GOOG)? He knew that GEICO had great success with the company’s ad platform, so he kicked himself in the pants with that miss.
Snowflake’s premise is a bit like that of Google – charging a use fee each time every user accesses or analyzes its data warehouse. And the company does it so well that it constantly adds new users and has consistently beat out legacy providers.
Like Google, Snowflake will only grow more powerful the more users it adds, the more data it uploads, and the more analytics ran.
GEICO adopted the Snowflake platform early and followed with an investment in the company – Buffett was not going to be beat at his own game again.
Why Did Berkshire Buy Snowflake: Wrap Up
This newest Berkshire investment is just one more sign that Buffett’s investment tactics have evolved over time. The man has thrived in nearly every market situation, environment, and economic condition because of his ability to adapt.
His interest in the SNOW stock is merely validation of not only the company’s product but also the product’s future potential.
Given the value origin, the fact that investors like Buffett, Benioff, and Combs are fine with paying such high multiples further indicates that future performance will justify these big moves.
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