Snowflake released its S-1 and will IPO with the ticker SNOW. The company was founded in 2012. It is the second-fastest growing SaaS company at the time of IPO. It is the No. 3 fastest-growing publicly traded SaaS company. It’s currently doing just over $500 million in annualized run rate revenue (ARRR). Growth per annum is still in excess of 100%. The company will IPO between $75 and $85 per share. At the midpoint of the range, its valuation will exceed $21 billion.
The most surprising fact about this IPO is that Warren Buffett is buying in through Berkshire Hathaway (BKR.A, BRK.B). This is remarkable because he traditionally loathes IPOs. In 2018, Buffett told CNBC: “In 54 years, I don’t think Berkshire has ever bought a new issue,” and on top of that this is Snowflake. A company that describes its business as an “integrated cloud data platform.” And Buffett is plowing ~$560 million in there.
Usually, IPOs aren’t great investments, and I usually avoid even researching them. Academic research confirms the notion it is generally better to buy in one year after the IPO. I only went over this one because it seemed so uncharacteristic for Berkshire to buy in. After reading the S-1, there are several things that stood out to me that Warren Buffett – or potentially one of his lieutenants – may have liked.
Snowflake provides a data platform in the cloud. It is a platform geared towards larger corporate clients. These can pull in data from different applications and places and subsequently access it faster, analyze it faster, and the bar to manipulate the data is lowered. The latter is important because it means there is a larger pool of people that have the skills to work with this platform. It is also very easy to share data with outside parties within Snowflake.
Storing data to enable analysis sounds really simple. It is not a complex service, but my understanding is that Snowflake is able to do this incredibly well, which really sets the service apart from others.
Berkshire’s first foray into tech happened to be into IBM Corp. (IBM). At the time, IBM was mainly an enterprise software company. Over time, it lost business to competitors working in the cloud. Buffett witnessed IBM losing that race and ultimately sold out of the business. It is possible he likes the model of selling to enterprise and cloud businesses. Rarely are these companies priced at low multiples in today’s market.
Customers can pay on demand or for prepaid capacity to get volume discounts. The business requires very little working capital. Potentially, it will even move into negative working capital at some point. That’s something Buffett likes a lot.
The business model is a little bit different from traditional SaaS in that customers aren’t locked into a subscription. The downside is that you can theoretically lose customers within a very short time frame. But if companies run mission-critical systems through Snowflake, it should have some protection against that happening.
The upside of this model where customers pay for use is that the company is able to charge voracious users more. Snowflake runs on top of the major cloud computing platforms Azure (MSFT), AWS (AMZN), etc. These bill Snowflake, and Snowflake bills its users and adds its take rate. As data usage among companies grows, so does Snowflake’s revenue, theoretically without any additional customer acquisition costs (in regard to that type of growth).
Many tech SaaS scale-ups are run by a founder. But Snowflake is led by an experienced CEO who has previously grown ServiceNow (NOW) from a small company into a big one. This is the third company Frank Slootman is taking public. Snowflake was founded by Oracle (ORCL) engineers. I can imagine that’s something Buffett is more comfortable with.
Using Snowflake, organizations can easily share their data with third parties in a secure way. As more companies get onto Snowflake, its data marketplace can grow with additional providers and consumers. If Snowflake can really get its platform functions going, that creates a type of “moat” that’s been shown to be very powerful. Usually, these types of moats attract high multiples, but here, it is not a certainty that will be applicable.
Buffett doesn’t like loss-making businesses very much. Snowflake is definitely still losing money. But from its disclosed financials, it is clear that the company is losing less money as a percentage of revenue as revenue increases. That’s something that isn’t clear with every SaaS business.
The company also generates some revenue through services. Under that segment, it provides consultancy to get customers up and running. Snowflake is losing a lot of money on that segment. The cost of that revenue exceeds the revenue itself. But the service revenue isn’t growing nearly as fast as the revenue from its core business. Meaning, over time, the losses on that front become less meaningful as part of the big picture. I’m looking at that segment as a customer acquisition cost. These services are likely provided to major clients that need help implementing Snowflake to make it work with their existing infrastructure. Losing money here in the short term could actually be a healthy signal of future non-service revenue to come.
For good measure, I want to call out one other thing Buffett traditionally isn’t too fond of, which is the difference in voting power between the A and B shares. The A shares, held by insiders have 10 times the voting power of the B shares. It is quite common these days, but it depresses the value of the B shares. Theoretically, great management doesn’t need this protection.
Still, Buffett is likely going to shell out 40x sales for a company that’s losing money. That sells a technology that could theoretically get disrupted by another upstart within years. That can potentially build a moat around its business but that’s yet unproven. I wouldn’t be surprised if this investment is championed by one of Buffett’s lieutenants.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SNOW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.