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Sydnee Gatewood
Sydnee Gatewood
Articles (2960) 

Warren Buffett's Berkshire Shovels Snowflake Into Portfolio

The guru makes a rare investment in an IPO

As disclosed earlier this month, Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) revealed it established a 2.21% stake in software company Snowflake Inc. (NYSE:SNOW) ahead of its initial public offering on Sept. 16.

The legendary guru, who leads the Omaha, Nebraska-based insurance conglomerate, along with his two portfolio managers, Ted Weschler and Todd Combs, follow a long-term value investing approach that focuses on companies that have understandable business models, favorable long-term prospects and competent management teams that are available at attractive prices.

According to GuruFocus Real-Time Picks, a Premium feature, Berkshire invested in 6.12 million shares of the San Mateo, California-based tech company on Sept. 19, allocating 0.72% of the equity portfolio to the stake.

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While the stock traded for an average price of $240 on the day of the transaction, the original agreement with Snowflake noted the $250 million investment would be made at the initial assumed IPO price of around $80 per share. This translated into roughly 3.12 million shares.

Berkshire also agreed to a purchase slightly over 4 million shares from one of Snowflake's investors in a secondary transaction at the IPO price, which closed immediately following the stock's debut.

Valuation and stock performance

Snowflake has a $69.11 billion market cap; its shares were trading around $249.76 on Tuesday with a price-book ratio of 77.95 and a price-sales ratio of 202.24.

In the days following its IPO, GuruFocus data shows the stock fell as much as 15% before recovering.

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An unusual investment with appealing traits

Snowflake, which was founded in 2012, is an unusual investment for Buffett as the legendary guru has tended to avoid tech startups in the past since he considers them to be outside his circle of competence. He also has not made a habit of investing in newly public companies since they do not typically have sufficient information available for analysis.

While it could be argued that Weschler or Combs are more likely to have pursued this deal than Buffett and Vice Chairman Charlie Munger (Trades, Portfolio), the investment could still be indicative of the direction Berkshire Hathaway's investment team may be heading in the future since, despite its eye-watering valuation, the company does have some of the traits the Oracle of Omaha values: a sustainable moat and good management.

Snowflake's main product is a cloud-based data warehouse that operates across the three major public clouds. By taking advantage of the trends it saw forming in big data processing over time, Snowflake developed a platform that is able to take all of a company's data, regardless of the source, and make sense of it, providing value-added services that its competitors have yet to replicate.

In addition, Snowflake has recorded strong growth over the past year. For the six months ended July 31, the company recorded a 133% year-over-year increase in revenue to $242 million. For full-year 2020, it estimates revenue is on track to reach $500 million.

If Snowflake continues to grow rapidly and becomes the undisputed leader in the space before other competitors can snatch up market share, it could potentially create a sustainable moat around the business. The key to keeping it, however, will be continuous innovation of the technology to stay ahead of the game.

Another key trait that might have caught the guru's eye is Snowflake's management team. The company was founded by two former Oracle (NYSE:ORCL) employees, Benoit Dageville and Thierry Cruanes, and one of the co-founders of Dutch data startup Vectorwise, Marcin Zukowski.

Although the three founders have plenty of industry-related knowledge and experience between them, they needed to find an ideal candidate to lead the company as it prepared to go public.

They found this candidate in Frank Slootman, who came out of retirement in 2019 to become Snowflake's CEO. He is no stranger to taking a company public, having done so twice before joining the software company. He was previously the chief executive of ServiceNow Inc. (NYSE:NOW), an industry leader in cloud-based, back-end software vendors for large enterprise customers, from 2011 to 2017. During that time, he grew the company's revenue from $100 million to $1.4 billion. He also took charge in taking Data Domain, which was later acquired by EMC and is now part of Dell Technologies (NYSE:DELL), public in 2007.

The combination of a wide moat, rapid growth and guidance from individuals who know the space well and have ample experience with industry-leading players bode well for Snowflake's future and are compelling points in favor of the stock.

Portfolio composition

Berkshire's $202.41 billion equity portfolio consisted of 44 stocks as of June 30. A majority of the portfolio was invested in technology stocks at 45.76%, while the financial services sector has a weight of 31.72% and the consumer defensive space represents 15.01%.

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Other tech companies Buffett's firm was invested in as of the end of the second quarter were Apple Inc. (NASDAQ:AAPL), which is also its largest holding, VeriSign Inc. (NASDAQ:VRSN) and StoneCo Ltd. (NASDAQ:STNE).

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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