Warren Buffett has raised eyebrows after reports revealed that Berkshire Hathaway is participating in the Snowflake IPO.
This has been a year of shocks and surprises. In the investing world, practically everyone would have bet that Warren Buffett would stubbornly stick to his value-investing strategies. Now, this no longer holds as Berkshire Hathaway is set to participate in the public listing of a U.S. tech startup for the first time.
Cloud-based data-warehousing startup Snowflake will go public on Wednesday, September 16, with Berkshire being one of the big names participating. Berkshire Hathaway will buy Snowflake’s shares worth over $500 million in the initial public offering.
This move will no doubt invite cheers from those who had grown weary of Berkshire’s underperformance in recent years. But it is still a radical departure for a value investor. The deal additionally possesses significant downsides for the investing conglomerate.
In its pre-IPO initial registration form, Snowflake acknowledged that it operates in a highly competitive market. Some of its competitors include Amazon Web Services, Microsoft Azure, and Google Cloud Platform.
Additionally, Snowflake offers its platform on these public cloud providers. This raises the risk that the cloud giants could replicate Snowflake’s product and bundle it with other products.
These large cloud companies can use other tactics against Snowflake, such as offering it unfavorable pricing, acquiring smaller competitors, and make it difficult for the startup to continue doing business.
In what should send shivers down the spines of investors, Snowflake admits that a “substantial majority” of its business runs on Amazon’s public cloud. Amazon is under antitrust investigation in North America and Europe. Amazon is being accused of leveraging data from its users to launch competing products.
Snowflake, which is less than a decade old, is in a delicate situation as it could easily be overpowered. Unless Berkshire Hathaway thinks the tech rally will continue forever while ignoring all fundamentals, the investing conglomerate is engaging in speculation, not investing.
Snowflake has been a loss-maker since inception. Cumulatively, the company’s losses had reached over $870 million as of July 31. The tech startup expects its costs and expenses to keep rising for the foreseeable future.
The startup admits it can’t determine when it will fully fund its ongoing operations or growth from profits generated by the business. This suggests that even after listing publicly, Snowflake might require additional financing, either by issuing new stock or through debt.
If the former, this will dilute shareholder value. If the latter, it will increase the company’s operating expenses.
Berkshire Hathaway’s decades-long success is as a result of consistency and sticking to time-tested investing principles.
Four years ago, Buffett confessed that “in 54 years, I don’t think Berkshire has ever bought a new issue.” Since then, a notable exception has been an investment in Brazilian startup StoneCo.
According to the Oracle of Omaha, most investors participate in IPOs because of the hype. Others do it out of peer pressure and because they think they will get rich. For Buffett, this is not a sound investment basis.
Now Berkshire Hathaway seems to be breaking its rules.
In the current tech bubble climate, chances are high that Snowflake’s stock will go above the IPO price once it starts trading. But is Snowflake a business Buffett considers durable and with long-lasting competitive advantages?
It feels more like Warren Buffett has been bitten by the tech FOMO bug than anything else.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.
Last modified: September 23, 2020 2:31 PM