Warren Buffett (Trades, Portfolio) is not known as a technology investor. In fact, he avoided the sector entirely for many years. However, today, his company Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) holds positions in tech stocks that operate in sectors such as cloud computing and fintech.
It is likely Buffett didn't build these positions himself. He's always said he will stay away from sectors he does not understand. I don't think he's suddenly become an expert on cloud computing. Therefore, I think it's more likely that one of his portfolio managers was behind these trades. Todd Combs and Ted Weschler are likely to know more about these industries due to their connections in the hedge fund and financial sectors.
Still, I think it's worth looking into Berkshire's tech holdings, of which Snowflake (SNOW, Financial) is one. At the end of the first quarter, Berkshire's holding in this company was worth $1.4 billion, giving it a portfolio weight of 0.5%.
Berkshire and Snowflake
Snowflake was one of the hottest tech stocks of 2020, and at one point, was valued above $200 billion.
The company is, at its core, a cloud computing business. The organization helps clients streamline their data storage by pulling all information onto a centralized cloud-based platform. Companies can then manipulate or view data using third-party services. This offering has attracted some big-name clients, including Kraft Heinz (KHC, Financial).
It could be possible that Berkshire decided to invest after gaining detailed customer-side knowledge about its product from managers at Kraft Heinz, which is a significant investment for the conglomerate.
Snowflake's total customer numbers jumped 73% to reach 4,139 at the end of fiscal 2021, including 186 of the Fortune 500 companies. Meanwhile, revenues rose 124% to $592 million. Following this growth, revenues increased another 110% in the first quarter of fiscal 2022. Overall, Wall Street expects the company's total revenue to exceed $1.1 billion by the end of the first half of fiscal 2022.
Clearly, the firm's product is in demand. However, it is still losing money hand over fist. Last year, Snowflake lost $539 million, worse than the $348 million it lost in the prior year. The net loss more than doubled in the first quarter of fiscal 2022 to $203 million.
One worrying trend is that stock-based compensation for the executive team consumed most of the firm's revenue as it continued to expand, and this trend is one that is likely to continue.
The way I see it, there are two takeaways from these numbers. First of all, the company provides something customers want. Second, the company is being run in a way that is making it increasingly inefficient, even though it seems like a high portion of its inefficiencies could easily be eliminated if it was management's priority. Clearly, customers are not willing to foot double the bill to pay for stock-based compensation, otherwise the company would have raised its prices and become profitable already.
Competitive market
Competition is a fairly big issue considering the general state of the cloud computing industry. Cloud computing has seen tremendous growth in recent years, but it's becoming harder to earn a profit with so many providers chasing the market.
Further, many providers, Snowflake included, rely on rented server space. In this case, Snowflake's platform runs on Amazon's (AMZN, Financial) Amazon Web Services (AWS) and Microsoft's (MSFT, Financial) Azure. Essentially, the company relies on its largest competitors to produce its core product. Not only does this add in a layer of risk, but it also increases costs.
This structure illustrates another critical risk with companies like Snowflake. Companies such as Microsoft and Amazon have a competitive advantage because they have the financial resources to build server space. Companies that piggyback off this do not have a competitive advantage. Compared to building the servers in the first place, buying space for cloud computing is very easy.
As such, while it seems clear to me that companies do want to buy Snowflake's offering, I find it difficult to see how the business will perform over the next five or 10 years with a limited competitive advantage and rising losses.
