| | | Snowflake's IPO draws flurry of excitement, but sky-high valuation may cause a meltdown (SNOW)
briefing.com
After Snowflake's (SNOW) 28.0 mln share IPO priced at $120, well above the upwardly revised $100-$110 price range, it became the largest software IPO in history, raising $3.36 bln in proceeds. The company, however, left billions in capital on the table after the stock incredibly opened for trading at $245.
Not since Facebook (FB) went public in 2012 have we seen this level of euphoria for an IPO. The praise from the financial media, analysts, and investors alike has been unceasing, helping to fuel a stampede into the IPO.
The exuberance is understandable, but is it rational?
SNOW's growth is exceptional, illustrated by revenue surging 132% to $242 mln over the first six months of the year. Also, as a play on the ever-increasing amount of data moving to the public cloud, the company is only in the early innings of its growth curve.
The company's data cloud platform, which is built into Amazon's (AMZN) AWS, Microsoft's (MSFT) Azure, and Google (GOOG) Cloud, enables enterprises to consolidate vast amounts of data into a single source. Its customers can then transform the data into analytics, helping them to draw insights from key business metrics.
Clearly, SNOW operates within a sweet-spot in the technology sector.
However, the huge opening has created a mind-bending valuation that makes Zoom Video (ZM) and its 38x forward P/S look like a bargain. To put SNOW's valuation into perspective, consider the following points:
- This past February, SNOW was valued at ~$12.4 bln. Now, the market cap has ballooned to ~$85 bln, representing a 585% increase in just seven months.
- In the IPO prospectus, the company estimates that its addressable market opportunity is approximately $81 bln. In other words, the company is currently valued higher than its TAM.
- Even if SNOW's FY21 revenue more than doubles from its current annualized run-rate, its forward P/S would still be meteoric at ~90x.
- SNOW isn't close to profitability, posting an operating loss of ($174.1) mln for the six months ended July 31, 2020.
Based on this evidence, it seems that Alan Greenspan's "irrational exuberance" phrase from the 1990s is indeed fitting.
Tugging at investors' emotions is the fact that Warren Buffet's Berkshire Hathaway (BRK.A) and Marc Benioff's Salesforce (CRM) each invested $250 mln through a common stock private placement. In fact, Buffett also agreed to buy another 4 mln shares from former SNOW CEO Robert Muglia in a secondary transaction, paying the IPO price for each share.
Being in alignment with an investing legend like Warren Buffet is comforting, but buying SNOW in the open market after a 200%+ pop is a completely different deal.
Another factor that catapulted the stock higher is that the float of 28.0 mln shares is very low for a deal of this prominence. Demand has completely wiped out supply, throwing more gasoline onto the fire.
There is plenty to like about SNOW and the company's prospects are very bright. The hype and momentum underlying the IPO may push the stock to even greater heights in the coming days. Eventually, the exuberance will diminish though, and traders will lock in their gains. Once the buzz fades and the party ends, SNOW's sky-high valuation could give plenty of investors a nasty headache. |
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