Why Warren Buffett's $570 million bet on Snowflake is rarer than any unicorn
roughly $570 million into Snowflake when the cloud-data platform goes public at a potential $24 billion valuation in the coming weeks. The famed investor's company participating in an initial public offering by a"unicorn" - a private startup valued at over $1 billion - might just be a rarer sight than a horned horse.
Berkshire has signed up to buy $250 million worth of Snowflake's stock in a private placement. It has also agreed to purchase 4 million shares from former Snowflake CEO Robert Muglia at the IPO price. Snowflake expects to price its shares between $75 and $85. As a result, Berkshire is set to shell out between $550 million and $590 million for roughly 7 million to 7.4 million shares. Berkshire's shares are likely to give it a 2.5% to 2.6% stake in the software group, which is targeting a valuation of $20.9 billion to $23.7 billion - more than 78 times its revenue last fiscal year.Berkshire's bet on Snowflake is surprising because Buffett has avoided technology stocks for most of his career. The investor has historically preferred to stay within his"circle of competence" and invest in companies he understands. One of Buffett's deputies, Todd Combs, is likely behind the Snowflake investment as his signature is in the. However, it's still a jarring departure for Berkshire to back a tech company that lost close to $350 million last fiscal year. Berkshire's stable of businesses is dominated by steady, reliable businesses such as utilities, manufacturers, retailers, and insurers. Similarly, the biggest holdings in its stock portfolio are relatively staid companies such as American Express, Coca-Cola, Bank of America, and Kraft Heinz.in Berkshire's portfolio. However, Berkshire only invested a few years ago, and Buffett views the iPhone maker more as a consumer-products company than a tech firm.Buffett and his business partner, Charlie Munger, have avoided IPOs and warned investors against participating in them for a long time.CNBC interview last year . The sole exception is StoneCo, a Brazilian digital-payments group that Berkshire backed when it went public in 2018. Buffett highlighted the hype around IPOs, and the strong incentives to drive up their price, as compelling reasons to stay away. "How can it be the best single thing to use your money for in a given day [when] everybody in the world is pushing it?" Buffett asked."It just doesn't make any sense."Buffett also pointed out at Berkshire's 2004 annual meeting that the timing of IPOs tends to favor the company, not its new investors. "The seller decides when to come to market in most cases," he said."They don't pick a time necessarily that's good for you.""I certainly wouldn't buy a business for $25 billion," Buffett said, adding that it would have to earn $2.5 billion to $3 billion in pre-tax income in five years"to even be on the same radar screen as things you can buy now." The investor also dismissed the idea that avoiding IPOs means missing out on future stars such as Amazon and Google, as he argued most of them turn out to be duds. "You can go around making dumb bets and win," he said."It's not something you want to take as a lifetime policy, though." Berkshire's reputation for eschewing IPOs has led to companies not even bothering to contact Berkshire before going public.Given Buffett's historical aversion to tech companies and IPOs, it's deeply surprising that his company is buying into an loss-making software business at a sky-high valuation. The best explanation may be that Buffett trusts Combs' judgement, especially as $570 million isn't too large a bet for a company with a roughly $200 billion stock portfolio and close to $150 billion in cash at the last count. The Snowflake investment is also the latest sign that Berkshire is revamping its strategy and seeking out new types of investments.
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