Markets

Did Warren Buffett Just Make $800 Million on the Snowflake IPO?

A few days before Snowflake's (NYSE: SNOW) highly anticipated initial public offering (IPO), a regulatory filing revealed that Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), the conglomerate led by billionaire investor Warren Buffett, had agreed to purchase $250 million of the company's stock at the IPO price. This was a very surprising move, as Berkshire has never invested in an IPO in the 55 years Buffett has been in charge, and Buffett himself hasn't purchased a new issue since Ford went public in 1956.

In addition to this amount, Berkshire simultaneously bought 4.04 million shares from an existing Snowflake investor. Based on the $120 IPO price, Berkshire owns a little more than 6.1 million shares of the cloud computing company, a stake equivalent to about 2.2% of the outstanding shares.

On IPO day, Snowflake's share price soared, reaching an intraday high of $319 and settling at just under $254, a gain of more than 111% on day one. Doing the math, Berkshire's 6.1 million shares increased by about $817 million on Snowflake's first day as a publicly traded company -- not a bad return in just a few hours.

Pile of bundles of hundred dollar bills.

Image source: Getty Images.

A few flaws with the recent headlines

There have been several headlines about the IPO's performance to the effect of "Warren Buffett Made $800 Million on Snowflake's IPO." And while it's technically correct, there are a few major flaws with the wording. To put it mildly, these headlines aren't telling investors the full story.

First of all, the $800 million profit is an unrealized gain. Buffett didn't (as far as we know) hit the sell button and cash in. He's a buy-and-hold investor, so cashing in on a profit shortly after making an investment simply isn't his style.

Second, Buffett didn't make anything -- Berkshire Hathaway did. Warren Buffett is the CEO of Berkshire Hathaway and owns about 16% of Berkshire's shares. So Buffett's share of the unrealized Snowflake gain is about $130 million -- not $800 million. Buffett's name is often used interchangeably with Berkshire Hathaway's company name when referring to investments -- and to be fair, Buffett himself still controls the vast majority of Berkshire's stock portfolio. But it's important to understand that Buffett didn't personally invest in the IPO.

Finally, Warren Buffett wasn't behind the Snowflake investment. One of his stock-picking investment managers, Ted Weschler or Todd Combs (or both) made the decision to participate in Snowflake's IPO. We know that Combs' signature is on the IPO filing and that Buffett generally avoids tech-focused investments. Weschler and/or Combs were responsible for initiating Berkshire's Apple investment and for buying shares of Amazon, among other tech-sector stock purchases.

Making quick profits isn't Buffett's style

It's also important to realize that Berkshire doesn't want to quickly "make $800 million" on this or any other investment. If that were the case, the company would have sold the stock on IPO day. An $800 million windfall is certainly a lot of money, but it would barely be a needle-mover for Berkshire. This would translate to a gain of roughly 0.15% based on Berkshire's current market cap.

While Warren Buffett's stock-picking lieutenants are certainly more tech-focused than Buffett is, they generally have the same buy-and-hold investment philosophy. In other words, the goal of the Snowflake investment isn't to make a quick buck -- it's to add a position to Berkshire's stock portfolio that has the potential to create billions of dollars in value for the company's shareholders over the long run.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of Apple and Berkshire Hathaway (B shares) and has the following options: short October 2020 $140 calls on Apple. The Motley Fool owns shares of and recommends Amazon, Apple, and Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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