Berkshire Hathaway’s investment and Snowflake (symbol SNOW) is a wake-up call to all investors, for both value and growth.
The stake it took was a whopping $730 million. And yes, it made a 100% gain in the first day of trading, making their investment worth $1.6 billion before Warren Buffett, the CEO of Berkshire, even cracked open his second Coke Classic of the day. And it’s easy to get all wrapped up in that, the gain, not the Coke, and think, “Golly, that Buffett is amazing and rich and amazingly rich.”
But that would mean we just see the glitz and glitter; we’re missing the big picture because there was a seismic shift that happened when Berkshire invested in Snowflake.
The Real Meaning Behind Investing in Snowflake
They shifted to growth investing. I’m not saying that Berkshire believes that value investing is dead or that they won’t be looking for those types of opportunities ever again. But they are legitimizing growth investing. If you look beyond the noise of Snowflake’s doubling and this and that return, you can see the signal that Berkshire is sending is revolutionary. Remember, to learn from any investor, don’t listen to what they say but what they do. And what Berkshire did was invest in an IPO that was already expensive and carries all of the uncertainties of a tech IPO, yet, they still invested. Yeah, it’s big.
Sure, Berkshire isn’t unfamiliar with investing in tech. Two of their largest holdings are in Apple and Amazon, longtime darlings of the market. And as much as Apple could be considered a value play, Amazon certainly was not and still isn’t. It has always been expensive. But investing in Snowflake is another step toward a different investing framework that is evolving in Berkshire. And here are some of my thoughts about it.
It’s validating an investing strategy that has long been perceived as being at odds with value investing. I don’t think Buffett thought that. But it was clear in his previous investments in consumer goods and airlines, etc. he was investing like a classic value investor. And as the world changed and their performance shrunk and dwindled while the technology sector seemed to be swallowing the universe with tremendous growth year after year, it doesn’t take a genius to see that the world has changed. Now we see the greatest value investor act in a way that is contrary to that investment philosophy.
Now we shouldn’t just pay attention to the macro steps but also the micro ones. By doing that, we can learn from why they invested in Snowflake and made this change.
What We Learn From Berkshire Investing in Snowflake
They weren’t spraying and praying. No, Berkshire knew the power of Snowflake. They were informed and intentional. As an earlier customer of Snowflake, Geico used it to store and analyze their data. They knew Snowflake’s monetization model since they likely pay them a lot of money. And they probably did it happily since they found their services invaluable. That insight and experience caused Geico’s CEO to lead one of the earlier rounds of investing in Snowflake, pre-IPO. And all of that information was almost certainly shared with Berkshire and Buffett. So they had deep, intimate knowledge of what Snowflake does and what it could do in the future.
Berkshire focused on winners. Geico started using Snowflake, presumably because their service and platform was better than other providers. They saw the edge. Snowflake had set themselves apart from their competitors in their offering of better technology and services. Berkshire had an early look into Snowflake at scale, since Geico is a large company with massive data. And if Snowflake helped Geico make more informed and insightful decisions through Snowflake’s product, that’s an incredible advantage as an investor. They saw how powerful the product is and how much it can bring to any industry, company, customer. And it looks like Berkshire believes Snowflake can be a dominant force in their market.
I had a similar experience at a much smaller scale. My company used Shopify and Twilio to build software solutions for our clients. And my business partner kept on talking about how great these platforms were. And once I realized that they were publicly traded companies, I invested. And they, especially Shopify, have performed incredibly well for me. That’s what experiential information with first-hand experiences as a customer, like Geico had, can do. It gives a powerful insight into a company. It helps you see how valuable it really is.
The reason that Snowflake is different from Amazon and Apple is that the latter two already dominate their respective industries. Who’s better and bigger than they? No one. The likelihood they will get knocked off their lead is very unlikely, especially in the near future. So they are relatively safe investments. It’s a more of a value play. But Snowflake isn’t that dominant. They are not the biggest player in their industry. So there is inherent uncertainty. Yet, Berkshire still invested.
Why This Matters to All Investors
Why does this matter to us, smaller investors? It should make us re-think. If you are a value investor, it should make you reconsider your investment strategy. When one of the greatest value investors starts to use a growth methodology in force, all value investors should reconsider their core investing tenants. And it’s true; we don’t know if he was the one that decided to invest in Snowflake. It could have been one of his heirs to the Berkshire throne.
And I don’t know if Buffett or Berkshire is moving away from value investing. But the company is certainly moving toward growth investing. And that should make every investor wonder why.
And one clear reason is that those who have invested with a growth strategy have performed incredibly well. Not all, of course. But many. Anyone who invested in Amazon, Netflix, and Google early vastly outperformed the market. It seems that Berkshire doesn’t want to lose out on future companies like those. For instance, they had the chance to invest in Google when it IPO’d but turn it down because they thought it was too expensive at $24 billion. Now Google makes that in yearly revenue. And Berkshire doesn’t want to make that mistake again.
Also, for growth investors, this shift is good news. It means there will be more capital, more eyeballs, more people rushing to get into growth companies. That will buoy the entire stock market, especially for technology-based, high growth companies with an edge, playing in a large market, like Snowflake. That means prices for these stocks will likely go up faster and higher with greater multiples than before. We already see that. Snowflake is a perfect example, by rising 100% on day one of trading. And it’s continuing to rise, and there’s no telling when it’s going to stop. It probably won’t for a very long time.
Of course, not every technology stock wins. Not every platform grows and dominates. There are losers. Look at Quibi. So every investor must be careful, shrewd, diligent. We’ve all got to do our homework. And really, I don’t know if every company will have crazy high multiples and that investors will always tolerate super expensive investments. But for the foreseeable future, they will. They already are, even Berkshire.
And this, I believe, is only the beginning.
For a giant has awoken.