Berkshire Hathaway’s Big Bet On Big Data With Snowflake’s IPO
Warren Buffett is notorious for guiding his massive conglomerate, Berkshire Hathaway (BRK.A) (BRK.B), by the core tenets of value investing. Under his leadership, the business has a long history of buying excellent companies at a fair price, but things have not always been this way. Originally, Buffett’s ideology was more along the cigar-butt style of investing proposed by Benjamin Graham. This involved buying fair or even poor companies at a wonderful price and taking one last ‘puff’ from them before they died. As his conglomerate grew and the influence of partner Charlie Munger rubbed off on him, his strategy shifted to what made Berkshire the behemoth it is today. Now, it looks like times are changing again.
In the new era, there are few excellent companies that can be bought at a fair price that are large enough to move the needle for the Oracle of Omaha. With the continued shift of our society toward technological innovation and the influence of younger managers like Ted Weschler and Todd Combs, Berkshire’s approach has been changing. The latest example now is Berkshire’s decision to invest hundreds of millions of dollars into the IPO of Snowflake (SNOW). Weschler and Combs have been largely responsible for smaller investments around this size, but Buffett has not been absent from decisions on the tech side. Probably the greatest example of Buffett’s commitment to this change was his willingness to allow Berkshire’s stake in Apple (AAPL) to grow to more than $100 billion (including appreciation of the stock in the business) as of August of this year. Because of the size of the deal, it’s unclear who all is responsible for the decision to participate in Snowflake’s IPO, but it could be a sign that investors should consider following suit if they can buy in at a price similar to what Berkshire is receiving in the transaction.
A look at the move
Though Buffett has not always stayed away from IPOs, investing in them has been a rarity. His view has been that they are generally overpriced. In this case, however, Berkshire has decided to throw caution to the wind. According to the terms of the agreement between Snowflake and Berkshire, the latter will acquire $250 million worth of Class A common units in the IPO. They are joined by a Salesforce (CRM) subsidiary, which is making a transaction of identical size. This will be new money injected into Snowflake, and unlike the rest of the company’s IPO, it will not carry underwriting fees and discounts. If Snowflake goes public at $80 per unit, which is the mid-point of its expected range, this would translate to Berkshire receiving 3.125 million common shares in the business. In addition, Berkshire has agreed to buy 4.042 million Class A common units from existing shareholders in the business at the IPO price. Collectively, this could result in a price to Berkshire of $573.36 million with the $250 million commitment factored in and assuming the $80 per share estimate.
This maneuver by Berkshire is part of a larger offering by Snowflake. The company is issuing 28 million Class A common units, plus they are making another 4.20 million available for their underwriters. In all, if the IPO price is $80 per share, the company would receive net proceeds of between $2.7 billion and $3 billion. That’s inclusive of the combined $500 million that Berkshire and Salesforce are allocating toward it. With everything said and done, and without factoring other possible share issuances that could be made for employee compensation and other things, Snowflake should end up with 278.78 million common units available, valuing the firm at around $22.30 billion. All incoming investors are receiving Class A common shares, while insiders are receiving Class B ones. Economically speaking, these units are identical. However, the Class A units carry just one vote apiece, while the Class B units carry 10. This gives the insiders of the business an overwhelming majority of the vote over the business’ affairs.
An interesting prospect to consider
Until the dust settles, it’s impossible to know where the market will value Snowflake. Having said that, investors should consider picking up some units in the business. Fundamentally, this may seem odd, since the business historically has only lost money and is certainly overvalued with such a large market cap as what is projected. Having said that, its business model is sound and its growth is phenomenal. On the business side, it may be worth mentioning what exactly the firm does.
According to management, Snowflake, at its core, is the provider of what it calls its Cloud Data Platform. This platform hosts the Data Cloud, which is an ecosystem that allows customers to break down data, analyze it through innovative data sets, and derive value from the results of their analysis. One example video shows a bike-sharing firm looking at user behavior data and comparing it with independent weather data to determine the cause of slow times of the year. This is a gross understatement of all that the business does, but the best way to view the firm is through the lens of its layers. The first of these is a storage layer that collects and unifies structured and semi-structured data. The second layer is where users compute that data using common data sets. The third includes the firm’s cloud services, which help to optimize a user’s use cases.
Recently, customers have come to realize the potential that Snowflake has toward optimizing their data. Consider, for instance, the firm’s financial performance. In the first two quarters of its most recent fiscal year, revenue has come out to $241.96 million. This is more than double the $104.04 million seen the same time last year. In the fiscal year ending in January of 2019, sales were just $96.67 million. They have surged in the latest completed fiscal year to $264.75 million. As you can see in the image above, Snowflake’s profitability has been a concern, but in the first two quarters of the current fiscal year, it saw operating cash outflows total just $45.27 million. This compares favorably to the $110.02 million seen a year earlier.
What has caused Snowflake’s growth is something really simple: a surging customer count. At the end of its latest fiscal year, the firm had 2,392 clients. This is up from 948 a year earlier. Total customer count today is closer to 3,117, up from 1,547 a year ago. In the month of July this year, the larger user base has a significant impact on Snowflake’s activity. The firm reported 507 million daily queries during the month. This is nearly double the 254 million seen in July of 2019. Such rapid growth combined with how quickly the company is approaching operating cash flow breakeven is encouraging.
Right now, Snowflake represents an interesting prospect. What’s more, it’s a firm that has the rare distinction of being both tech-oriented and that was vetted by Berkshire. As the world becomes more digital in nature, data will hold ever-greater importance in our lives and Berkshire and Salesforce probably both see this as a play on the growth of data in the global economy. Are shares pricey for where the company is fundamentally? Without a doubt. But is it likely to experience tremendous upside growth in the years to come? I would say yes.
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