If the last two years have taught us anything, it’s to be cautious about investing in IPOs, even if more often than not they tend to deliver on a post-launch boost, before settling down.
A decent rule of thumb tends to be the more hyped the IPO, the worse it tends to do, which maybe helps explain why Snap, Uber and Lyft have performed so poorly in the immediate aftermath of their launches.
That being said there are some, like Zoom Video and DocuSign that defy conventional wisdom and do well, and then you have companies like Beyond Meat that defy convention completely and soar exponentially without any relevance to the underlying fundamentals.
With the recent volatility surrounding the tech sector still fresh in mind, this week’s launch of Snowflake is another IPO that is generating excitement, but with little of the fanfare that has accompanied some of the more high-profile IPOs of the past few years.
Does this mean for one moment that it is going to be as successful as Zoom, or fall flat on its face like Uber? In all honesty it’s hard to say given that so few of the recent IPOs trade anywhere close to their underlying fundamentals.
As with any IPO it’s always a good idea to understand why the company is coming to market as well as who its backers are. This usually tells you a lot about the company’s prospects, and in the case of the likes of Uber and the failure of WeWork, it was clear that SoftBank was looking for an out.
Snowflake already has a decent client base, albeit in the very competitive space of cloud computing and data warehousing, where it is competing in the sandbox of the likes of Amazon, Oracle, Alphabet and Nvidia.
A list of its clients already include the likes of Sainsbury's, Capital One, Adobe and Deliveroo, with the company generating over $265m in revenue in 2019, an increase of over 170%.
In the first half of this fiscal year, the company has returned $242m in revenue, leaving it on course to double its turnover for this year. Be warned however as the company is still not profitable, but its new customer growth is quite something. At the end of last year the company upped its client count from 948 to 2,392, and this year it has added 800 more, taking the total above 3,100.
The company also has an impressive list of high-profile backers including Salesforce and Warren Buffet’s Berkshire Hathaway, who have both pledged to invest $250m in the business at a price equivalent to the final IPO price. Berkshire has also said it will invest a further $250m by way of a private purchase, also at the IPO price.
With such well-known investors the outlook appears positive for the company, but the sums involved also need to be put in the context of the size of Berkshire Hathaway and Salesforce. They represent a very small percentage of the overall size of their total investment portfolios.
Nonetheless, the Snowflake IPO price has been moved up from between $75 and $85, to a higher $100 to $110 range, in response to the recent increase in interest in the wake of these significant new investments, valuing the business at $30bn.
The big question now in an age of big data is whether Snowflake can continue its recent stellar progress, and growth of new clients, or whether the interest that’s been shown in the past few days starts to melt away.
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