Some big name investment managers own shares of cloud-native data warehouding company Snowflake (SNOW, Financial), including Chase Coleman (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio). However, there was one famous value investor who shocked the market by revealing a stake in the company: Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A)(BRK.B). The Berkshire team built a pretty sizable position, amounting to more than 15% of the company before its public offering at a cost just shy of $735 million. Given the size of the position, it was likely Todd Combs and Ted Weschler who initiated the position, based on Buffett's past comments.
The 6,125,376 shares Berkshire Hathaway bought in 2020 are now worth slightly more than $1 billion, which is still in the green thanks to getting in at pre-IPO prices, but I believe it's likely to get worse before it gets better. In fact, I am still a little flabbergasted at this investment to be honest. It definitely doesn’t tick the traditional value investment strategic playbook that Berkshire typically follows. While the position is still up 40% in aggregate, the company is a long way from justifying the current market value.
Snowflake is a cloud-native data warehousing company that generates the majority of revenue from fees charged to customers based on the data resources consumed on its platform as a single offering. Snowflake is now priced at a $53 billion market capitalization, which is 29 times sales and nearly 10 times book value. Snowflake is only consistent at losing a ton of money, thus there are no positive returns on assets or equity.
Snowflake is a good business, just not a good value
Snowflake, as with other enterprise software offerings, is very sticky, which should give the company the ability to turn revenue into profit over the long-term. Snowflake has successfully identified major issues that clients have faced when moving workloads to the public cloud, including slow data queries, expensive data transformation and incorrect results. To address these issues, it created a platform that provides access to its data lake, warehouse and marketplace on various public clouds.
The public cloud has led to an increased demand for the ability to access data from multiple databases in one place. Data warehouses can fulfill this need, but cannot provide artificial intelligence insights. Data lakes address this issue by storing raw data that can be used to build AI models and generate insights. These insights are then stored in a data warehouse, making them readily available for querying. Snowflake is doing the hard task of making information exchangeable and useable across multiple public clouds at a better cost. This allows customers to take advantage of performance-enhancing capabilities on their chosen clouds without needing to expend resources to configure environments for compatibility.
Snowflake remains unprofitable
Snowflake has never produced a profit, which will be a great tax reduction benefit for the future, but for investors today, it doesn’t make sense. The company has seen explosive growth, growing revenue from $96 million in 2019 to nearly $1.9 billion in the last 12 months. And, from a gross profit standpoint, the numbers look good at 65% margins. However, that’s where the fun stops. It spends 106% of the gross profit on selling, general and administrative costs and over 55% on research and development. Snowflake has a solid cash position north of $4 billion and only $252 million in total debt.
As far as the company is concerned, Snowflake has a great opportunity to become a major player in the data industry for years to come. It now has over 7,200 total customers, including 287 worth over $1 million. It also added 28 accounts from the Global 2000 in the last quarter. At some point in the future, this will trade at a price to be a good investment. I just don’t think that potential is worth $52 billion today, even with revenue growing at a stellar 67% year-over-year.
An investment worth making... down the line
The main thing that could cause Snowflake to lose its edge is if either Amazon's (AMZN, Financial) Amazon Web Services (AWS) or Microsoft's (MSFT, Financial) Azure will open up their ecosystems. Both companies have huge resources that could be utilized to challenge Snowflake in this space, but that's unlikely to be a threat anytime soon, if ever. In the meantime, Snowflake is expecting revenue to push past $10 billion by the end of the decade. If it can get margins in line with other SaaS providers, it will be generating a decent profit.
For Berkshire Hathaway, a pre-IPO investment is super strange. Moreover, a normal IPO trader would have scaled back by now at least a little to bag the massive profits. Maybe I'm wrong and Snowflake is actually going to reach a level profitability that justifies this market cap sooner than expected. In just over 10 years, the company has become a force in the industry, with its market capitalization exceeding that of established corporations like Kraft Heinz (KHC, Financial), another Berkshire holding. However, while Kraft Heinz generates $5.86 billion in Ebitda on $25 billion in revenue to justify its place, Snowflake has a long way to go to hit those figures.
Never forget rule number one
As Buffett himself once said, "Rule number one: Never lose money. Rule number two: Never forget rule number one." That's what this really boils down to. The company has great potential, but it's still a ways away from profitability.
