The hottest IPO of the year is cloud-based data warehouse provider Snowflake (NYSE:SNOW). It was initially slated to go public at $75 to $85 per share last Wednesday, but interest in the stock was so high that the company wound up issuing shares at $120 on its IPO day. However, once Snowflake hit the market, the stock skyrocketed as much as 175% on its first day of trading, before ending the week at $240, exactly 100% higher than its IPO price.
At least part of the enthusiasm for Snowflake's shares came from the fact that Warren Buffett's conglomerate, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), bought hundreds of millions in stock, which was a huge surprise. Buying a high-growth, money-losing, and expensive-looking initial public offering was a very uncharacteristic move for Berkshire, which has famously avoided technology stocks and especially red-hot IPOs for its entire corporate life.
However, in an interview Friday, Snowflake CEO Frank Slootman shed some light on why Berkshire might have invested in Snowflake, and who within the Berkshire management team might have made the decision.
It's no surprise
In an interview with Yahoo! Finance Friday, Snowflake CEO Frank Slootman was asked about the Berkshire investment and what might have led the company to invest in Snowflake. Slootman had said that most of Snowflake's interactions had been with Todd Combs, one of Buffett's younger lieutenants.
Not only is Combs one of the chief investment officers at Berkshire, but he's also currently CEO of GEICO, the large auto insurer that's wholly owned by Berkshire. Apparently, Berkshire's insurance operations have used Snowflake's cloud-based data warehouse for some time, so Combs was probably intimately familiar with Snowflake's product and capabilities.
Slootman also added that "they are also evolving to become a much more tech-aware, tech-focused, tech centric conglomerate" and that "maybe that's the younger generation at Berkshire. I'm not sure how to characterize it."
Clearly, Combs liked the product and was willing to pay a hefty price for shares at the outset. So far, that's looking like a pretty good bet, as Berkshire has gotten a quick double on its shares.
But even Slootman thinks Snowflake's stock action was nutty last week
Certainly, with Berkshire having gotten behind Snowflake's product and its stock, you might think of jumping in. However, during the same interview, Slootman also admitted the company had received far more interest than even he, as a big-time owner of the stock, had ever imagined.
When asked if the company left money on the table by not pricing the shares even higher, Slootman responded:
We need to live with our investors for a very long period of time, so we try to sign up people that can hold multibillion-dollar positions, people that don't chase momentum up or down, and people that want to sign up for the mission for five or 10 years. And so that's a very different crowd from the people you saw on Wednesday, that were chasing this thing up. They were buying, you know, at any price. And there was zero discipline that has, you know, been pointed out by other observers.
It sure sounds as if Slootman is looking for the type of Foolish investor behavior we encourage, but it also seems that even he thought Snowflake's massive spike on Wednesday was ahead of the fundamentals.
Why Buffett may have given his blessing, and why you should keep Snowflake on your watchlist
Buffett has long said that he does not dictate how his lieutenants, Todd Combs or Ted Wechsler, invest, so it would be interesting to know what he thinks of the Snowflake investment. However, there's a chance even Buffett might have given his blessing, though Snowflake is an expensive growth stock. That's because Buffett has long admitted that he made a mistake by not investing in Google, now named Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL).
At the 2019 Berkshire Hathaway shareholder meeting, Buffett and partner Charlie Munger were asked about investing in technology stocks, and if they were anathema to the company's value investing ethos. During the answer, both Buffett and Munger mused about how they regretted missing out on Google.
That's because GEICO was also an early advertiser on Google's search engine, and Buffett and Munger could see how well the cost-per-click digital advertising worked for them. Munger said: "We could see in our own operations how well that Google advertising was working and we just sat there sucking our thumbs, so we are ashamed. We're trying to atone."
Google itself came public in 2004 at an expensive-looking valuation at the time of $23 billion, or $85 per share. That compared with the company's 2003 revenue of $961 million, for a price-to-sales ratio of 24.
We all know what happened. Fast-forward to today, and Alphabet's market cap is almost $1 trillion, up 17 times the IPO price in 16 years.
However, before you get too enthusiastic, consider that Snowflake's price-to-sales multiple is 156, almost 6 times the valuation of Google at its IPO.