It's not every day that Warren Buffett, famously averse to tech companies that aren't named after fruit, as well as IPOs in general, agrees to buy into a hot tech IPO. Yet that's exactly what Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is preparing to do.
To be clear, it's highly likely that the Oracle of Omaha is not making the call personally and instead one of his investing lieutenants (Todd Combs or Ted Weschler) made the decision, but presumably Buffett had to give his blessing for such a risky investment. Let's see if you should consider investing in Snowflake like Berkshire Hathaway is about to.
Half a billion from Berkshire
Cloud-based data-warehousing start-up Snowflake filed its initial S-1 Registration Statement a couple weeks ago and submitted an amended version this week that included some important updates. For starters, Snowflake expects to price the stock at $75 to $85 and raise approximately $2.7 billion in fresh capital. That would put the unicorn's market cap at $20.9 billion to $23.7 billion -- quite a jump from the $12.4 billion valuation that it fetched in February of this year in a Series G funding round.
Snowflake also disclosed that it will be conducting two concurrent private placements with Berkshire Hathaway and Salesforce Ventures, the venture capital arm of salesforce.com (NYSE:CRM), that will close immediately after the IPO. While Salesforce Ventures is a fixture in Silicon Valley private markets -- it already has a stake in Snowflake -- Berkshire Hathaway is decidedly not.
Buffett's investment holding company has agreed to purchase $250 million worth of Class A stock through a private placement. Based on the midpoint of the expected range ($80), that would be good for 3.13 million shares. On top of that, Berkshire Hathaway is buying another 4 million shares from former Snowflake CEO Robert Muglia at the IPO offer price, or another $323 million based on the midpoint. The end result will be Berkshire Hathaway spending over half a billion dollars to buy a 2.6% stake in Snowflake.
A value investor buying a high-growth tech IPO
What does Berkshire Hathaway see in Snowflake? In no uncertain terms, Snowflake's numbers are fantastic. Revenue skyrocketed 174% last fiscal year, and sales are up 133% in the first half of this fiscal year. The company now has 3,117 total customers, of which 56 have contributed over $1 million in trailing-12-month product revenue. That cohort of big spenders has more than doubled over the past year, up from 22 at the end of July 2019.
Remaining performance obligations (RPO), which represents future revenue under contract but not yet recognized, has more than tripled over the past year to $688.2 million. Existing customers continue to expand their relationships with Snowflake, as evidenced by a net revenue retention rate of 158%.
These types of figures will appeal to any growth investor, but Buffett tends to prefer value stocks instead of unprofitable start-ups, particularly those that are valued at nearly 60 times sales. Combs and Weschler are surely behind the move; let's see if they can prove Buffett wrong about tech IPOs.