What happened for me to turn from shorting a stock to going long?
In My Anti-Portfolio article, I discussed how while completing my finance degree, Warren Buffett taught me that investors should:
a) invest in companies they understand,
b) back management that is not just competent but shows candor,
c) avoid the institutional imperative (herd mindset) and
d) ultimately have a long term outlook: buy the stock, forget about it.
Then in Introducing my Portfolio, I mentioned that I focus on valuations more than any other metric (even moreso that revenues and EBITDA).
When I first spotted Snowflake, I felt the valuation of $100 billion+ was apoplectic (technically, I still do.) and felt it may be a good candidate to short. With a paltry amount of shares floating at the IPO, it was no wonder that shares had risen from its public debut. The subsequent March lockup period ending gave me more of an impetus to short the stock (shorting basically means selling a stock you don’t own at a given price on the assumption that you can buy it at a lower price, locking in a retroactive profit).
In my first period investing (in the early 2000s), I had shorted on stock – Sandisk – after I had owned it. The stock had gone up quite a bit, after I sold my shares, I felt it had gotten ahead of itself and I proceeded to short it. Initially, the shares kept climbing – giving me palpitations… before it came back down to earh, netting me an additional gain before I closed my position.
However, considering Tesla’s jaw-dropping, gravity-defying rise and that short-sellers lost $50 billion in 2020 alone, I didn’t do that. Instead, I dove in the company to find out why the sage of Omaha himself proceeded to go long. Note, for one, that Buffett bought stock pre-IPO, at a relatively low price. In other words, buying the shares because Buffett did so is somewhat moot, given the higher current price. Snowflake’s offering is compelling: companies are using more and more cloud-based services and software, having a global data warehousing solution and central dashboard to manage them all is indeed a valuable service.
The main danger IMHO is not so much that a Covid vaccine may dampen the demand for such services – the reality is that Covid will accelerate trends and unlike certain things like Doordash which should in theory see demand soften post-Covid (read: Why Doordash is not the next Priceline), a fundamental macro trend like the push to the cloud will not be reversed: it will only accelerate!
On the one hand, the main risk I see is that for many clients who use services from Google Cloud, Amazon AWS or Microsoft Azure, you may be compelled to simply use those companies’ competing data warehousing product, namely Google Cloud’s BigQuery, Amazon AWS’ Redshift, Microsoft Cosmos. Such behemoths cross sell as well as any other company.
That to me is a legit threat, but any good entrepreneur/executive/operator will be able to take threats and weaknesses and turn them into opportunities and strengths. Indeed, having a unique independent service like Snowflake is actually interesting for some companies who may not want to go all-in and double down on something like Google (who already controls a lot of the activity online, for one) but also because many companies may be view Google as a competitor. With Google – or should I say parent Alphabet – in so many industries, more companies will hesitate to lean in on Google than those who will be compelled to double down on the big G. Snowflake, after all, has 3,000 clients!
However, just because Microsoft/Amazon/Google have similar products doesn’t mean that those data warehousing services will out-hustle Snowflake. Companies do a few things very well, and these big technology firms may do many things well, but they don’t do everything well, meaning there’s room for Snowflake to not just win more market share, but also end up becoming prey to these trillion dollar giants. When I noticed Snowflake’s valuation at $100 billion, I fell off my chair given IBM’s similar valuation or Salesforce $200 billion market cap… but I also acknowledge that the more companies compete in this space, the more dance partners may exist for Snowflake in terms of M&A.
In the end, instead of shorting the stock (which I had decided not to do based on what happened not just to Tesla shorts but the market in general in 2020) but buy a few shares to keep an eye on it. I was going to hold off until March to dollar cost average but used the recent dip to buy a bit more. For now, I will hold on to my position until post March where I suspect the shares may show more weakness, at which point I will load up and go very long.
Given my very long term horizon of 10+ years, I feel confident that Snowflake will end up winning a lot of business provided it stays focused on its segment. But in the meantime, expect a bit of a rocky ride taking those moguls!
DISCLAIMER: Nothing here should be misconstrued as investing advice. I am NOT licensed to give any advice. These writings are intended as entertainment to put into context how a media entrepreneur and investor thinks, given my unique time horizon and risk profile. Educate yourself, read up on mistakes others have made and speak to a licensed professional who can help you based on your investment profile and time horizon. The majority of my holdings are in safer, value stocks and managed by professionals. My direct investments portfolio represent riskier investments that make sense for my time horizon.