Snowflake Is an Unexpected Buffett Bet That Makes Perfect Sense

Cloud-based platform provider Snowflake (NYSE:SNOW) is not the type of company one would typically expect Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett to invest in. Normally you’d see Buffett and Berkshire buy Wells Fargo (NYSE:WFC) or JPMorgan Chase (NYSE:JPM), not SNOW stock, of all things.

Snowflake (SNOW) IPO on the NYSE

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For one thing, Buffett is known for refusing to invest in anything he doesn’t understand. That’s a smart policy for an investor to have.

Yet, one has to wonder whether an old-fashioned, folksy guy like Warren Buffett really understands a cloud infrastructure company like Snowflake.

Maybe he doesn’t need to understand the finer points of cloud computing. More important than knowing the technical aspects of the cloud is assessing Snowflake’s value proposition for shareholders, as well as the growth prospects of a firm that specializes in cloud-data warehousing.

Still, I have to admit that it seems odd for the Oracle of Omaha to buy into a recent initial public offering (IPO). It’s just not something that Buffett would normally do. But then, these aren’t normal times we’re living in, are they?

A Closer Look at SNOW Stock

The IPO for SNOW stock took place on Sept. 16, and it turned out to be the biggest tech IPO of the year. Incredibly, the IPO price was set at $120 but after the stock opened on its first day of public trading, the SNOW share price ran as high as $319.

I have to give Snowflake Chief Executive Frank Slootman credit for acknowledging the implications of such a steep share-price run-up:

“Does this put pressure on us? Of course it does… It’s a vote of confidence,” Slootman said. “But clearly as a management group and as an employee base we have to work very hard to deliver on it.”

Fair enough. In any case, it’s worth noting that Berkshire Hathaway didn’t pay a high price for SNOW stock. In fact, Berkshire agreed to buy $250 million worth Snowflake stock in a private placement at a cost of just $120 per share.

That pretty well sums up the difference between the ultra-wealthy and the rest of us, doesn’t it? They get to buy stock shares at a massive discount before retail traders get access to them at much higher prices. On Nov. 13, investors were able to obtain SNOW stock at $234.80, which at least is a bargain compared to the $319 high point.

Why Berkshire’s Purchase Made Sense

Buffett is known as a value-focused investor. Therefore, it might be surprising that he would approve the purchase of SNOW stock.

I ran a quick check and found that the trailing 12-month earnings per share for SNOW stock is -$6.54. Typically, a negative number would be a major red flag for value investors.

Yet, we must bear in mind that SNOW stock hasn’t been trading for 12 months, so there might not be a sufficient sample size here to make a valid judgment.

Besides, any valuation measurement is going to be drastically different when we consider that Berkshire got in at the ultra-low price of $120 per share. Surely, Buffett knew full well that Snowflake was a buzz-worthy, red-hot IPO and that traders would bid the SNOW stock price up quickly.

Hence, it made perfect sense for an institutional investor to buy up SNOW stock share at the discount price of $120 apiece. The better question is, would it make sense to buy the stock today?

Seeing Snowflake’s Value Now

Something tells me that Berkshire didn’t buy SNOW stock just because it was available at a steep discount. Buffett takes his investments very seriously. There’s got to be more to the Snowflake stake than the low IPO price.

Buffett hasn’t disclosed his exact reasons for the SNOW stock purchase. One can surmise, however that he’s making a bet on the future growth of a cloud-data warehousing specialist.

Snowflake has deals with Microsoft (NASDAQ:MSFT), Salesforce (NYSE:CRM) and Amazon (NASDAQ:AMZN). Thus, even cloud-savvy companies turn to Snowflake for its unique, multi-cluster shared data architecture.

As the company boasts, Snowflake’s platform enables clients to focus on the data, not the infrastructure. It’s no wonder that the company had over 3,100 clients by the end of July.

The Bottom Line

Does Buffett fully understand all of the technical details of the cloud? He doesn’t need to, really. Snowflake’s numerous high-profile clients appreciate the company’s value.

Perhaps that’s reason enough for Berkshire to take a position in SNOW stock. So, should prospective investors buy the stock today? If you believe in the company, absolutely.

You won’t get to buy the shares at the IPO price like Berkshire did. That’s unfortunate. Nonetheless, Snowflake has a tech-enhanced service that’s in high demand. So maybe, even at the higher price, SNOW stock is still a good value after all.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/snow-stock-is-an-unexpected-buffett-bet-that-makes-perfect-sense/.

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