Everybody loves an exciting IPO, even now that a little bit of the bloom has come off the rose in the past month or so with the speculative tech stocks mostly dipping well off their highs, so this pitch from Alexander Green at the Oxford Club caught my eye — he’s got what he calls a “IPO Superstar” in mind, and he’ll tell you what it is (just as soon as you pony up $1,975 for a two-year subscription to his Insider Alert newsletter — there is a refund clause, but only after two years since you only get to request a refund if they don’t give you a chance for 20 100%+ gains over the full term).
So let’s see if we can figure it out for a somewhat lower price, shall we? I’m thinking maybe free-ish? That way you can think it over and get a little of that profit lust out of your head for a moment — if you’re like most people, if you don’t pay for a “stock tip,” you’re likely to consider it more rationally… if you pay $1,975 primarily just to learn about a hot stock, most folks will be predisposed to skip past any warning signs.
So… what is it?
Here’s some of the intro email that leads us into the Insider Alert promo…
“For example, it is widely known that the broad market has returned approximately 10% a year over the last 200 years.
“But since 2010, according to a study by Schaeffer’s Research, the average one-year return for a post-IPO stock was 22.3%.
“And many – like Tesla (Nasdaq: TSLA), Peloton (Nasdaq: PTON) and Moderna (Nasdaq: MRNA) – have done far, far better.
“However, I’ve recently uncovered a post-IPO stock that has as much upside potential as any of those three.
“In fact, I believe it has the potential to become the hottest stock of the next decade.”
So that’s today’s secret stock… and as is typical of a newsletter pitch, they do throw in some quotes from brand-name sources to let you know that Green isn’t just making this up…
“Barron’s reports that it’s ‘generating stunning growth.’
“Forbes says its ‘growth potential is staggering.’
“Fortune magazine believes the firm will ‘become a tech giant.'”
And there are a few other hints in there as well…
“Customers include 165 of the Fortune 500 companies… and 70% of the ultra-exclusive Fortune 10 companies. The best of the best.
“And company insiders agree. They are not just buying. Insiders have loaded up on these shares.
“Even Berkshire Hathaway Chairman Warren Buffett – who famously dislikes both IPOs and tech companies – made his first IPO investment since 1956 in this company….
“Sequoia Capital – the firm that backed Google, Apple, Oracle, PayPal and YouTube – invested $271 million in this new company.”
Ah… so that means we don’t even really have to check out the full presentation (though you can if you like), that’s actually enough clues to get us our answer. Thinkolator sez this is Snowflake (SNOW), which was indeed one of the splashiest IPOs last year, and which is releasing its key earnings report after the market close today.
So it’s hard to find a more precarious pick for the next couple hours than SNOW, at this point — it’s one of the most richly valued large companies in the world, it is growing at an incredible rate, and it is about to report its second quarter as a public company (they reported their third quarter in early December, which drove the shares to new highs, but the stock is now almost 40% below those highs).
What does Snowflake do? They’re essentially offering a data platform… here’s how they describe themselves:
“Snowflake’s founders started from scratch and built a data platform that would harness the immense power of the cloud. Thousands of customers around the world now mobilize their data in ways previously unimaginable with Snowflake’s cloud data platform — a solution for data warehousing, data lakes, data engineering, data science, data application development, and data exchange. Snowflake provides the near-unlimited scale, concurrency, and performance our customers in a variety of industries want, while delivering a single data experience that spans multiple clouds and geographies. But our founders’ vision didn’t stop there. Our cloud data platform is also the engine that drives the Data Cloud — the global ecosystem where thousands of organizations have seamless and governed access to explore, share, and unlock the potential of data.”Are you getting our free Daily Update
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There’s a nice little note from Sequoia Capital around the time of the IPO last year that sums up the story of building the business pretty nicely, too, if you want to get a little more background, and you can check out their latest investor presentations here if you want start to understand how the business works.
And yes, Snowflake was added to the Berkshire Hathaway portfolio last year, which was shocking to a lot of people — and those of us who follow Berkshire certainly noticed. This is what I noted about it at the time, in the October 2 Friday File:
Berkshire is now a large shareholder in SNOW, with 6.1 million shares that represent just over 15% of Snowflake’s outstanding shares (we only know this because investors who own more than 10% of a share class have to file their holding details) — they agreed to a substantial purchase as part of the IPO, about $250 million worth of the offering as well as 4 million shares the CEO wanted to sell, so they bought it at the IPO price ($120 per share), and enjoyed an immediate “pop” in the value of their holdings as the stock doubled that first day. SNOW did come back down for a bit, but as of now it’s still well above $200… which means that even for Berkshire Hathaway, this is a fairly meaningful position.
It’s not, however, 15% of the company — that would be worth something like $10 billion. This is more than 15% of the A shares, which is what were sold in the IPO. There are also something like 250 million B shares outstanding, close to 350 million fully diluted, and each of those is a “supervoting” share, giving those insiders and early investors ten votes per share and, most likely, perpetual voting control of the company (not unlike what we’ve seen with a lot of other tech stocks over the past decade or so). Berkshire’s stake of a little over 6.1 million shares is worth about $1.5 billion. That makes this Berkshire’s 18th largest common stock position, snugged right in there between Mastercard and Costco on the listing of common stocks that they own… meaningful, but a long way away from the huge positions ($115 billion in Apple, $25 billion in Bank of America, $20 billion in Coca Cola, etc.). Salesforce.com (CRM) holds a big stake in Snowflake as well, interestingly enough.
And while I imagine Warren Buffett was consulted on this call, given the size and the publicity they knew would be coming, it probably wasn’t his idea. Being relatively small, and in a very, very richly valued technology stock, that has all the hallmarks of being a decision made by one of his two investing lieutenants, and given the personal connections it was probably Todd Combs (who also serves as CEO of GEICO, a Snowflake customer). This is now the second fairly high profile IPO Berkshire has bought, the first was the Brazilian payments company Stone Co. (STNE) a couple years ago, and it’s a little jarring after the many screeds Warren Buffett and Charlie Munger issued against IPO investing, so I would assume that this is more of a vote of confidence in Combs than it is a real “let’s buy this” decision by Munger or Buffett — but you never know.
Snowflake’s operating performance has been spectacular, at least when it comes to growth, but it’s hard to imagine anyone taking it seriously as an investment at these prices — this is the only company I’ve noticed that’s trading at a richer valuation than Zoom Video (ZM), SNOW reported $242 million in revenue in the first half of this year (and a $171 million loss), so at that pace, even if we assume their current growth rate continues through the year, they’re trading at a nutty valuation. If the growth rate is consistent for the second half of 2020, then they should have about $340 million in revenue to close out the year, so that would be $682 million in sales for all of 2020… w