- Warren Buffett’s Berkshire Hathaway expects to invest approximately $ 570 million in Snowflake when the cloud-data platform goes public.
- Berkshire is expected to buy 7 to 7.4 million shares, for a stake of around 2.5%.
- The gamble is surprising because Buffett notoriously sticks to businesses he understands and has declared low-value IPOs.
- “We like to buy things that no one makes a dime on by selling them to us,”
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Warren Buffett’s Berkshire Hathaway will invest approximately $ 570 million in Snowflake when the cloud-data platform goes public with a potential valuation of $ 24 billion in the coming weeks.
The famous investor company participating in an initial public offering by a “unicorn” – a private startup worth over $ 1 billion – may be a rarer sight than a horse with horns.
Capturing the snowflakes
Berkshire has signed up to buy $ 250 million worth of Snowflake stock in a private placement. He also agreed to buy 4 million shares from former Snowflake CEO Robert Muglia at the IPO price.
Snowflake plans to list its shares at between $ 75 and $ 85. As a result, Berkshire is expected to shell out $ 550 million to $ 590 million for approximately 7 million to 7.4 million shares.
Berkshire’s stock is likely to give it a 2.5% to 2.6% stake in the software group, which points to a valuation of $ 20.9 billion to $ 23.7 billion, more than 78 times the its turnover last fiscal year.
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Berkshire’s bet on Snowflake is surprising because Buffett has avoided tech stocks for most of his career, preferring to stay in his “circle of expertise” and invest in companies he knows.
One of Buffett’s deputies, Todd Combs, is likely behind Snowflake’s investment, as his signature is in the IPO filing. Still, it’s still a jarring start for Berkshire to back a tech company that lost nearly $ 350 million last fiscal year.
The Berkshire stable is dominated by stable and reliable companies such as utilities, manufacturers, retailers and insurers. The largest holdings in its equity portfolio are relatively quiet companies, such as American Express, Coca-Cola, Bank of America and Kraft Heinz.
The glaring exception is Apple, the most valuable holding in Berkshire’s portfolio. However, Berkshire only invested a few years ago and Buffett sees the iPhone maker more as a consumer products company than a tech company.
‘They don’t even call us’
Buffett and Charlie Munger, his business partner, have long avoided IPOs and warned investors not to participate.
“In 54 years, I don’t think Berkshire has ever bought a new issue,” Buffett said in an interview with CNBC last year. The one exception is StoneCo, a Brazilian digital payments group that Berkshire backed when it went public in 2018.
Buffett pointed to the hype surrounding IPOs and strong incentives to push their price up as compelling reasons to stay away.
“How can it be the best thing that using your money on any given day is something you have pushed everyone in the world for?” Buffett said. “It just doesn’t make any sense.”
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He added: “We like to buy things that no one makes a penny for by selling them to us.”
Buffett also said at Berkshire’s 2004 annual meeting that the timing of an IPO tends to favor the company, not its new investors.
“The seller decides when to enter the market in most cases,” he said. “They don’t necessarily pick a time that’s good for you.”
Buffett said in another interview last year that evaluation was a major concern for him.
“I certainly wouldn’t buy a company for $ 25 billion,” Buffett said, adding that it would have to earn $ 2.5 billion to $ 3 billion in pre-tax revenue over five years “to also be on the same radar screen as the things you can. buy now. “
The investor also rejected the idea that avoiding IPOs means losing future stars like Amazon and Google; argued that most of them turn out to be stupid.
“You can go around making stupid bets and win,” he said. “It’s not something you want to take as a lifetime policy though.”
Berkshire’s reputation for avoiding IPOs has led companies not to even bother contacting Berkshire before going public.
“They don’t even call us,” Munger said in an interview with CNBC.
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A change of position
Given Buffett’s historic aversion to tech companies and IPOs, it’s deeply surprising that his company is buying a loss-making software business with a sky-high valuation.
The best explanation may be that Buffett trusts Combs’ judgment, especially since $ 570 million isn’t too big a bet for a company with an equity portfolio of around $ 200 billion and nearly $ 150 billion in cash at the last count.
The Snowflake investment is also the latest sign that Berkshire is revamping its strategy and looking for new types of investments.
For example, he first bought shares in a gold miner last quarter, revealed 5% stakes in Japan’s five largest trading companies just over a week ago, and last week he cut his stake. by Wells Fargo at a minimum of 17 years.