Why Warren Buffett is Buying Snowflake Stock
The best way to learn how to swim is to jump into the deep end of the pool and figure it out as you go along. That’s how most newbie investors enter the world of investing. Open a brokerage account, Google “best stock to buy,” follow some Foolish recommendation, panic, then drown. Rinse and repeat.
That’s not how you accumulate wealth. As the Oracle of Omaha says, “the stock market is a device for transferring money from the impatient to the patient.”
Over the years of developing our dividend growth investing strategy, we’ve found ourselves gravitating towards many of Warren Buffett’s nuggets of wisdom.
- When you buy a stock, plan to hold it forever.
- Most news is noise, not news
- The best moves are usually boring
We’re now developing The Nanalyze Disruptive Tech Investing Methodology which incorporates more of Buffett’s rules.
- Invest in what you know and nothing more
- Diversification can be dangerous
- Pretend the market is closing for five years after you buy a stock
We didn’t start by looking at what Warren Buffett says and mimicking it, we simply arrived at some of the same conclusions because these are the truths that you learn from experience, the things you rarely hear mainstream pundits talk about. They don’t teach you this stuff when you get an advanced finance degree either.
Warren Buffett has established somewhat of a cult following. Pundits often throw in a Buffett quote in their articles to sound wise. We’ve never read his books, or attended his legendary meetings in Omaha, but we’re always curious what investments he makes, especially in times of uncertainty. We weren’t planning on writing about the coming Snowflake IPO, but yesterday we read that Warren Buffett is investing in them. Given his aversion to all things tech, we decided to try and figure out why Warren Buffett is investing in Snowflake.
Founded in 2012, Silicon Valley startup Snowflake took in $1.4 billion in funding from names like Salesforce, Capital One, and Sequoia. The company started out by creating a data warehouse built for the cloud, and since then they’ve transformed into “an integrated cloud data platform.” As a Southeast Asian vendor might say, “same same, but different.” In order to understand who else is playing in their sandbox, we turned to the MBAs over at Gartner who produced the “Magic Quadrant for Data Management Solutions for Analytics” seen below:
Snowflake appears alongside some of the biggest names in tech in the “leadership” quadrant, having been added this year because they continue to gain momentum and customers. Users praise “the product’s capabilities, value for money, pricing and contract flexibility, and overall ease of deployment,” says Gartner.
Customer references for Snowflake report being able to run more workloads, and support more use cases than they were able to do with their previous platform, often with fewer resources.Credit: Gartner Magic Quadrant for Data Management Solutions for Analytics
Snowflake is clearly stealing market share from the “we’ve always done it this way” types like Oracle, a company that’s been the leader in database management solutions for a while now. Gartner says Oracle’s “pricing and licensing practices continue to be poorly thought of,” and their recently deployed cloud data centers need to compete against much bigger cloud providers who have been doing this a lot longer, at a much larger scale. These names include Amazon, Google, and Microsoft, the three cloud providers that Snowflake uses for their cloud platform.
If you’re interested in how Snowflake went from data warehouses to big data clouds, check out our article on Big Data vs. Data Warehouses. What’s the Difference? For the purposes of this article, we’ll put up this nice looking graphic so we can all thoughtfully nod and pretend what they do makes perfect sense now.
Snowflake’s Critical Metrics
Data is the new oil, the new black, the new electricity. If you help organizations manage their data more efficiently and at a better price, your value proposition is pretty straight forward. Since big data is growing exponentially because we can extract insights from it using machine learning, buying stock in a cloud-based data management platform makes sense. That could be what Mr. Buffett is thinking. He’s probably also still peeved at that old lackluster snail that he entrusted his hard-earned dollars with. No, not Ginni Rommetty, the company she used to run – IBM. Some say it was Warren Buffett’s worst investment, which means he really must feel strongly about getting back into tech, especially in these uncertain times.
Mr. Buffett may have been attracted to the impressive metrics surrounding the growth Snowflake is realizing, such as the growing number of customers:
- Beginning of 2019 – 948
- Beginning of 2020 – 2,392
- Middle of 2020 – 3,117
Snowflake tripled their customer list in 1.5 years, something that seems absolutely remarkable. We’re talking about some big names too – seven of the Fortune 10 and 146 of the Fortune 500. Regarding their business model, Snowflake prices on pure usage metrics. Says the company:
Product revenue is a key metric for us because we recognize revenue based on platform consumption, which is inherently variable at our customers’ discretion, and not based on the amount and duration of contract terms.Credit: Snowflake S-1
If revenues are a proxy for usage, Snowflake’s customers are using the hell out of the platform.
Then there’s the increased usage by existing customers. For the six months ended July 31st, 2020, net revenue retention rate – simply the year-over-year increase in revenues from existing customers – was 158%. It’s hard to imagine having a software-as-a–service (SaaS) business model where you could up-sell your +3,000 customers at such high levels. The whole thing just reeks of growth, and that could be because of the return on investment (ROI) Snowflake’s customers realize.
A Recession-Proof Business
If you’re selling a solution that saves your customers money, that’s an easy sell in the best of times. Whenever there’s a recession, CEOs will often clamp down on spending by freezing open headcounts and any large purchase orders. In times of turmoil, “doing more with less” is practically demanded of anyone with a P&L to manage.
A Forrester Total Economic Impact Study commissioned by Snowflake talks about how customers can realize an ROI by utilizing the platform. The 28-page report which features four of Snowflake’s key customers (presumably ones they cherry-picked) can be summarized by the below chart which would look quite compelling to any CTO who needs a quick win before bonus time rolls around:
The term “total benefits” is quite vague, so here’s the breakdown:
Some of this stuff seems hard to quantify (improved decision making because you can access data faster??), while the last two buckets seem more concrete, and reflect the comments made to Gartner by Snowflake’s customers. Simply put, using Snowflake’s solution means you can do more with less.
To Buy or Not to Buy
For most retail investors, the first day Snowflake’s shares begin trading is the earliest you can invest in the company. The wankers over at Robinhood have probably caught wind of Buffett’s move into Snowflake, and they probably think that means Warren will log into his brokerage account the day shares start trading and click buy as fast he can. That’s not how institutional investing works, and the price at which Snowflake opens and trades at after the IPO has no bearing on Buffett’s investment.
According to the S-1, Buffett will buy $573,363,440 worth of stock at an assumed price of $80 per share (the midpoint of the price range set forth on the cover page of this prospectus). Buying shares at that price point makes sense to Buffett, and we may even tack on an arbitrary premium since we’re not the Oracle of Omaha. A 10% premium means we would buy shares at $88 per share or less, but let’s not forget that tech isn’t Mr. Buffett’s forte. Maybe he’s totally calling this wrong, maybe he’s not. That’s why we need to make investment decisions based on our own convictions.
Snowflake seems like an interesting investment, but we’re wary of the volatility surrounding IPOs these days. Large index providers like MSCI typically wait until index reviews to add IPOs to indexes. Sometimes, they’ll add large IPOs early, but only as early as “the close of the security’s tenth day of trading.” Prospective investors might take that same approach. Start dollar-cost averaging at day eleven and add a fraction of your target position size on a fixed day each month.
If we had to guess why Warren Buffett is investing in Snowflake, it’s because they’re a rapidly growing firm that’s benefiting from the growth of big data and displacing some of the world’s biggest tech firms. When the dust settles, Snowflake will have upwards of $3 billion in their coffers which can be used to fuel growth internally or through acquisitions.
Mr. Buffett’s favorite indicator is flashing a warning about an overheated market, so he probably believes Snowflake is relatively recession proof. Now that every news outlet under the sun is running this story, expect volatility when shares start trading. If you’re a buyer, avoid trying to time the market and use dollar-cost-averaging, ideally starting your purchases once the dust settles a bit.
Snowflake is expected to start trading on the New York Stock Exchange on Wednesday, Sept.16 under the ticker “SNOW.”
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