Three Longs & Three Shorts

Snowflake’s IPO is a bet on companies using AI for everything

The most critical trait of a successful investor they say, is humility – the open mindedness that you could be wrong and change your view if need be. Who better to demonstrate that than the legend himself – Warren Buffett. In recent years, we have seen him change his stance on some long held beliefs. Having been critical about the airline business economics, he ended up becoming the largest owner of airline shares (only to sell out at the onset of the pandemic). Having resisted investments in technology companies, Apple is now his most successful investment ever amongst other increasing bets in technology companies – indeed, there are people making a case that Berkshire is perhaps the best play on technology. But the most stunning reversal in stance happened earlier this month – on IPOs. Buffett and Munger both have been critical of investing in IPOs until last month when Berkshire took a pre-IPO stake in Snowflake, a loss making company into cloud computing. The listing has been a riot with the stock more than doubling and is now over $70bn in market cap. So, what is Snowflake all about that drove Mr Buffett to change his long standing beliefs? This piece in the Quartz tries to explain that in simple terms. In short, Snowflake appears to take on both Amazon and Microsoft in cloud services, a business that has been the cash cow for Amazon and one that turned around Microsoft’s fortunes under Satya Nadella. The article suggests Snowflake’s technology can beat Amazon and Microsoft on efficiency and costs and hence provide itself a good shot at taking a meaningful slice of what is arguably the largest market opportunity today – provide cloud services for businesses across the world, all of which are looking to use data as a key source of competitive advantage.
“Snowflake is only able to take on a dominant, entrenched competitor like AWS because it has come up with a better solution for one problem: allowing companies to cheaply expand their reliance on AI to help them with an ever-growing set of business decisions. That is the vision Wall Street valued at roughly $70 billion today.
AI requires two key ingredients: huge troves of data and a lot of computing power. If you have both, you can monitor the performance of your business in granular detail (and in real time) to predict future conditions. Snowflake can help companies do this kind of analysis more often and at a lower cost: In July, Snowflake handled 507 million requests per day from companies looking to track key data points in real time, according to its IPO filing.    
Snowflake differentiates itself from competitors like AWS through its software architecture. The company divides its massive pool of computing power into three groups: One is dedicated to storing data, another is just for analyzing that data, and the third is a brain that keeps the other two running. The system can dedicate more resources to storage or data analysis on the fly, depending on demand.
AWS offers similar services, doesn’t separate data storage and analysis, which means clients effectively pay for more analytical computing power they may not use. Snowflake, by comparison, only charges clients for exactly as much storage and computing power as they need. Snowflake also makes it easier for companies to share data with clients and partners, or to buy and sell datasets on an internal marketplace.”