This Snowflake is anything but offended

• Global
• Airbnb, Ant Financial, Berkshire Hathaway, Initial Public Offering, IPO, Palantir, Snowflake
• September 16, 2020

In the year 2020, the term “snowflake” has become a commonly used derogatory term for anyone who is overly sensitive or easily offended. It’s often used with the word “triggered” which is the act of being offended.

In the investment world, Snowflake has become a landmark tech Initial Public Offering (IPO) story for a number of reasons. The only thing that was triggered in the traditional sense of the word was the valuation, which skyrocketed today after the company went public.

In the process of the biggest software IPO ever, at least three billionaires were newly minted.

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What does Snowflake do?

The company offers a “virtual data lake” which is described as a software layer between cloud providers like Amazon or Microsoft and customers’ own apps and programs.

It’s all a little Greek to me, but I do pay attention to is a company that grew its revenue 174% for the year ended January 2020 and 133% in the 6 months since then. The company boasts industry-leading net revenue retention of 158%.

As is so often the case with tech companies, Snowflake is still losing considerable sums of money every year. A net loss of $171.3m in the first 6 months of this financial year is no joke, although gross profit margin improved which would’ve been a strong attraction to investors. In the world of tech, you lose money for years before you suddenly make a fortune and reach unicorn status. Or not, as the case may be.

Plenty of value left on the table

IPOs are usually priced in such a way that the share price rises on the day of listing.

This is for a few reasons, including:

• Driving demand among investors to be included in the issuance of new shares at time of listing, which ensures that the capital raise is successful
• Achieving an active first day of trading
• Generating positive market sentiment as the share price initially rises and hopefully carries that momentum

The investment banks manage this carefully, including acting as a “market maker” when necessary on the day of the listing to avoid any price crashes. This means they buy up shares if the price dips, in an attempt to stabilise the market. The bankers sell them again as things improve.

There were no such issues in this IPO.

The company listed at $120 per share, but shares opened at $245 as investor demand went through the roof. There was a delay for several hours as the bankers tried to find a price at which the company would have enough sellers! After more trading chaos, things settled down between $260 and $265 a share.

This values the company at just under $75bn – not bad for a business that privately raised capital as recently as February 2020 at a valuation of $12.4bn. Lockdown certainly wasn’t bad for everyone.

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Even Buffett likes this one

Warren Buffett’s Berkshire Hathaway bought half the stake belonging to ex-CEO Bob Muglia at $120 per share. While Muglia is now a billionaire, he is probably kicking himself about selling after the share price went crazy as the company listed.

Buffett would’ve looked for all the fundamentals that matter, like real cash flows and sustainable revenue, protected by powerful competitive advantages. It bodes well for investors although one can safely speculate that the Omaha legend wouldn’t been quite as keen at the current traded price.

Further IPOs are coming

This IPO was red-hot. There’s plenty of stimulus liquidity in the market and there was nothing new to invest in for months. This IPO was timed perfectly and came off the back of terrific results out of Snowflake.

The rest of this year will see some big names coming to market in the US: Peter Thiel’s Palantir, Alibaba-backed Ant Financial and Airbnb will all join the fray.

One shouldn’t assume that Snowflake’s performance will be repeated by these three, but there is clearly a booming market for IPOs underway.

Take note: general market sentiment about Palantir isn’t as positive as it is for Ant Financial. Airbnb will need to show the world how it will perform in a post-lockdown reality.

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