You know what they say about IPOs: When it snows, it blizzards. Investing a huge chunk of the portfolio in IPOs by retail investors is a rather risky deal as you don’t know how the company is going to perform. Will it be able to deliver its promise? If the retail investors are allotted all the shares that they applied for, it means the institutional investors have passed it and they don’t believe in the company. Retail investors also face the risk of investing just because a trend says so. One needs to make sure if it’s sustainable. DoorDash, a food delivery company has benefitted with more demand because of the pandemic and is one of the most anticipated IPOs by the end of this year. But can it sustain demand post-COVID-19, is a question investors must thoroughly think about before investing.
As the lockdown came into place, the stock market plummeted. IPOs seemed unrealistic. No company would dare to test the market. However, the Federal Reserve took two steps to bring back recovery. It bought back corporate debt, in attempts of boosting investor confidence. And, it brought down the interest rates to nearly zero, which meant no returns on safe investments and more participation in the stock market. During this time period of low growth, people are desperate for it and the companies spotted an opportunity. They wanted to go public and harness all the excess cash people were willing to invest. The share price of Zoom, for example, jumped 100%, the day it went public. The Warner Music IPO also went well.
Then comes, Snowflake, a company that had probably remained unheard of by people outside of the tech industry. It proved to be the largest software IPO of all time. The eight-year-old startup provides cloud-based data management for businesses.
Bloomberg describes its product as “a vacuum sucking up data strewn across in different systems so that businesses can analyze it all together.”
The time Snowflake decided to enter the market was very strategic as investors were enthusiastic about any IPO that came their way. The enterprise cloud biz is torrential—lots of businesses need lots of data stored and analyzed. Snowflake is competing with mammoth incumbents Oracle and Amazon Web Services’ Redshift, but some analysts say Snowflake’s product is stronger and more flexible than the legacy players’.
Snowflake registered with the SEC at a price range of $75-$85 per share but ultimately listed its IPO at a price of $120 per share. It ended up raising $3.4 billion (28 million shares). Its shares were up 150% on the first day of trading and additionally managed to grab the attention of Warren Buffet, who agreed to invest $550 million. This is baffling, because Warren Buffet, a seasoned investor hasn’t invested in IPOs in almost 5 decades.
Snowflake has double the customers as compared to the same time last year and it has higher revenues. That being said, it also has mounting losses. Is the valuation justified? People who invest in growth stocks might believe so. Growth stocks are those shares that are expected to give a return significantly higher than the market return. Investors earn money through capital gains when they sell off their shares at a higher price. Snowflake being a cloud-based data warehousing company offers growth potential and therefore also ranked number 1 on the Forbes list of top 100 private companies in the world. These could be the potential reasons behind the enthusiasm shown by investors.
Businesses now more than ever are trying to set up networks on web-based platforms. Now, the question that arises is; will this trend continue or will things go back to normal once the pandemic ends? As of now, sustainability is what investors should be looking for before betting on a company.
- Bhoomika Wadhwa