They say no two snowflakes are alike, and tomorrow's IPO of Snowflake Inc. (SNOW) is certainly unique.
Not only will the stock be the biggest public offering for a US software firm in history, but the company also managed to convince Warren Buffett's value-focused, IPO-averse Berkshire Hathaway to invest more than $500M into a fast-growing, richly-valued technology company. For reference, the last IPO that Berkshire Hathaway invested in was Ford Motor Company in 1956!
So what do traders need to know about SNOW's IPO?
1. Following in the footsteps of Salesforce.com (who is investing hundreds of millions into the IPO as well), Snowflake offers a cloud-based database service that can be scaled up or down as needed. For many businesses, SNOW's variable pricing model is more compelling than the fixed packages offered by some bigger competitors.
2. From an investor's perspective, the company represents a "pure play" on the cloud computing space. In other words, traders can get exposure to one of the fastest-growing industries on the planet without buying an ad-dependent search engine business (GOOG) or a massive online retailer (AMZN).
3. The company initially proposed a price range of $75-85 per share, before dramatically upping that range to $100-$110. With the initial offering price now set at $120, the company already sports a $33B market capitalization just eight years since its founding. A mere seven months ago, private equity investors valued the company at $12.4B.
4. SNOW grew its revenues 175% in 2019 (from $96.7M to $264.7M) and already nearly matched the 2019 total in sales in the first six months of this year ($242M). That said, the company is currently unprofitable: after losing $178M in 2018, the company saw a losses grow to nearly $350M last year. As we've seen recently, many IPO investors are willing to look past present-day losses as long as revenues continue to grow exponentially (see ZM, CRWD, SHOP, UBER, and LYFT for recent examples of successful IPOs from unprofitable firms).
5. While not a big concern for short-term focused traders, early venture capital investors essentially control the company's decisions for the foreseeable future. The shares SNOW is offering to the public only confer 10% of the voting power of the Class B shares issues to VC funds. Though it is disappointing from a governance perspective to see "insiders" hoard Snowflake's decision-making authority with 98.5% of total voting power, these funds will undoubtedly be highly engaged and eager to see an early return on their investments. That said, there may be elevated risk of conflicts of interest between early investors and the public in the long run.
Make no mistake: trading the shares of any company on its IPO day can be a risky venture, but with an in-demand offering in one of the fastest-growing sectors on the planet, it makes sense why some investors will be plowing (pun intended) into SNOW tomorrow!
This research is for informational purposes and should not be construed as personal advice. Trading any financial market involves risk. Trading on leverage involves risk of losses greater than deposits.