I had never heard of Snowflake (NYSE:SNOW) until I read that Warren Buffett bought $250 million of SNOW stock at the IPO price of $120 and another 4.04 million shares from an existing shareholder.
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) bought a total of 6.12 million shares for approximately $730 million. As I write this on Oct. 8, Berkshire is sitting on an unrealized profit (maybe it’s already sold them) of $743 million.
Not a bad month’s work for the boys at America’s largest conglomerate.
SNOW Stock Delivers Healthy Gains
Given Buffett’s distaste for buying IPO stocks — Buffett last bought shares of Ford (NYSE:F) in 1956 — most believe that either Todd Combs or Ted Weschler was responsible for the trade.
“The idea of saying the best place in the world I could put my money is something where all the selling incentives are there, commissions are higher, the animal spirits are rising, that that’s going to better than 1,000 other things I could buy where there is no similar enthusiasm. … doesn’t make any sense,” Buffett stated in a 2019 CNBC interview.
Buffett’s not the only billionaire portfolio manager that’s not a fan of IPOs. I often like to quote Canadian money manager Stephen Jarislowsky, who wrote in his 2005 book, The Investment Zoo, that more often than not, investors can buy shares within 12-24 months for less than the IPO price.
Will you be able to buy SNOW for less than $120 at some point between now and September 2022?
I can’t tell you if the latest tech darling will experience a major fall from grace over the next two years, but I do think you ought to be able to pick up SNOW stock for less than $200 soon. That’s because an annualized return of almost 1,300% is tough to hold on to, no matter how good a company we’re talking about.
Forget Snowflake’s Name and Focus on Its Strengths
Before discussing why I think the long-term prospects for Snowflake and its business are good, let’s get the elephant in the room out of the way so we can move on to important subjects.
A September article from Street.com lays out the reasons for its silly name.
While co-founder Marcin Zukowski gives three reasons for naming the company Snowflake, Zukowski’s admission that most of the founders were fans of the mountains, snow, and skiing brought them to name it something totally nonsensical.
Don’t get me wrong; I’m not saying this because I have a giant pole up my keister; I believe good company names often help identify what a business does to make money. Snowflake does none of that.
Fortunately for SNOW shareholders, what’s most important to its business’s success is a focus on executing its growth strategy and being willing to pivot when your customers tell you to.
It isn’t easy to do.
Its Strengths Are What Matter
InvestorPlace contributor Divya Premkumar recently discussed why Snowflake stock is worth the hype.
She focuses on two ideas: The first being that Snowflake has over 3,100 clients helping each of them take their databases for the cloud to the next level. Product means something, but as I said, so does execution, and that’s where chief executive officer Frank Slootman comes into play. Slootman is a veteran of the tech industry and knows what he’s doing.
“The tech veteran managed a slew of high-growth tech companies before Snowflake. His goal was to create a product that would help companies store and manage their digital data,” Premkumar stated on Oct. 7.
“A function that became increasingly important during the pandemic. Slootman also adopted a subscription-based model that helped Snowflake stand out from a sea of competitors.”
Growth is the Prediction
Quality product, significant target market, and excellent management translate to manageable, ultimately profitable growth.
Through the first six months of 2020, Snowflake had operating losses of $174.1 million from $242.0 million in sales. That might seem horrendous until you consider that its operating margin went from -176% in the first six months of 2019 to -72% in the latest six-month period.
A few more quarters of growth while managing its expenses and Snowflake could be making money on a GAAP basis, never mind a non-GAAP profit.
In Snowflake, Buffett’s investment lieutenants saw a cloud-based business that is markedly different from many of its peers. That doesn’t mean they won’t take profits. But even if they do, dumb name or not, I don’t think you should take a pass on Snowflake stock.
Bottom Line on SNOW Stock
My suggestion is you buy a quarter position now and wait to see if it falls below $200. I’d fill a half position if it does, leaving a little dry powder should it fall back to its IPO price.
That said, expecting it to fall by 50% to $120 might be asking for too much. Long term (2-3 years), I could see Snowflake trading much higher.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.