Why Warren Buffett’s $570 million bet on Snowflake is rarer than any unicorn

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Summary List Placement

Warren Buffett’s Berkshire Hathaway plans to invest about $570 million into Snowflake when the cloud-data platform goes public.
Berkshire is set to buy about 7 million to 7.4 million shares, giving it a roughly 2.5% stake.
The bet is striking because Buffett famously sticks to businesses he understands, and has blasted IPOs as being poor value for money.
“We like to buy things where nobody’s making a dime selling them to us,” Buffett said in an interview last year.

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Warren Buffett’s Berkshire Hathaway is set to invest roughly $570 million into Snowflake when the cloud-data platform goes public at a potential $24 billion valuation in the coming weeks.

The famed investor’s company participating in an initial public offering by a “unicorn” — a private startup valued at over $1 billion — might just be a rarer sight than a horned horse.

Catching snowflakes

Berkshire has signed up to buy $250 million worth of Snowflake’s stock in a private placement. It has also agreed to purchase 4 million shares from former Snowflake CEO Robert Muglia at the IPO price.

Snowflake expects to price its shares between $75 and $85. As a result, Berkshire is set to shell out between $550 million and $590 million for roughly 7 million to 7.4 million shares.

Berkshire’s shares are likely to give it a 2.5% to 2.6% stake in the software group, which is targeting a valuation of $20.9 billion to $23.7 billion — more than 78 times its revenue last fiscal year.

Avoiding technology

Berkshire’s bet on Snowflake is surprising because Buffett has avoided technology stocks for most of his career. The investor has historically preferred to stay within his “circle of competence” and invest in companies he understands.

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One of Buffett’s deputies, Todd Combs, is likely behind the Snowflake investment as his signature is in the IPO filing. However, it’s still a jarring departure for Berkshire to back a tech company that lost close to $350 million last fiscal year.

Berkshire’s stable of businesses is dominated by steady, reliable businesses such as utilities, manufacturers, retailers, and insurers. Similarly, the biggest holdings in its stock portfolio are relatively staid companies such as American Express, Coca-Cola, Bank of America, and Kraft Heinz.

The glaring exception is Apple, the most valuable holding in Berkshire’s portfolio. However, Berkshire only invested a few years ago, and Buffett views the iPhone maker more as a consumer-products company than a tech firm.

‘They don’t even call us’

Buffett and his business partner, Charlie Munger, have avoided IPOs and warned investors against participating in them for a long time.

“In 54 years I don’t think Berkshire’s ever bought a new issue,” Buffett said in a CNBC interview last year. The sole exception is StoneCo, a Brazilian digital-payments group that Berkshire backed when it went public in 2018.

Buffett highlighted the hype around IPOs, and the strong incentives to drive up their price, as compelling reasons to stay away.

“How can it be the best single thing to use your money for in a given day [when] …read more

Source:: Business Insider

      

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