As a long-time investor, I have made it a general rule of thumb to avoid buying stocks when they are debuting on the public markets – and there are many reasons why (I’ll come back to this in one minute) .
Having said that, I am considering breaking my own rule and putting a small amount of my own money into an upcoming IPO that shows more than the average amount of pledges: Snowflake.
Snowflake is a cloud-based data management company that plans to trade its shares on the New York Stock Exchange using the ticker symbol “SNOW”. The company has yet to schedule its debut, but some reports suggest the IPO could take place as early as Wednesday next week.
A recent regulatory filing reveals that Snowflake plans to offer 28 million shares in a range of $ 75 to $ 85 per share, which would raise more than $ 2.7 billion for the start-up. That would value the company at nearly $ 24 billion in the high end.
Many reasons to avoid IPOs
Individual investors almost never intervene in the IPO (price), especially when there is a high level of interest, as there seems to be with Snowflake. This privilege is reserved for investment banks and institutional investors, who have better access to equities before they go public. Additionally, IPOs are usually much riskier than your average investment as they come with a lot of uncertainty due to the lack of significant track record that comes with these fledgling companies.
There are other potential problems. Just because a company has captured the public’s imagination doesn’t mean it will be a good investment. Elevator and Uber were some of the most anticipated IPOs in the years they debuted just weeks apart in early 2019, but they didn’t live up to the hype. Since their IPOs, Lyft and Uber have fallen 62% and 12%, respectively, leaving early investors to hold the bag.
For each rule, there is an exception
There are several reasons why I am considering an investment in Snowflake. The first is the company’s staggering revenue growth rate, even though its balance sheet is admittedly short.
For the fiscal year ended Jan.31, 2020, Snowflake reported revenue of nearly $ 265 million, up 173% year-over-year. The breakneck pace of growth continued in the first half of 2020, with revenue of $ 242 million, up 133%. It should be noted that the earnings for the first six months of this year are almost at the same level as last year – that’s saying something. It’s also important to note that the company’s bottom line is still solidly in the red, as its net loss of $ 349 million last year worsened from a loss of $ 178 million the year. former. There has been an improvement over the past six months, however, as Snowflake reduced its losses to $ 171 million, from $ 177 million the year before.
There is more. Just this week, Snowflake revealed that there are some high profile backers for his public debut. Warren Buffett at the helm Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) and salesforce.com (NYSE: CRM) have each agreed to invest $ 250 million in the company through concurrent private placements at a price equal to the final IPO price. In addition, Berkshire will also buy an additional 4 million shares from the former CEO of Snowflake in a private transaction, also paying the price of the IPO. This could bring Buffett’s total investment to over $ 500 million.
Salesforce Ventures, the tech giant’s investment arm, has a pretty impressive track record for investing in early-stage tech start-ups. The company has already invested in Focus on video communications, Twilio, and DocuSign, each of which has enjoyed enormous success since their public debut.
Warren Buffett has avoided IPOs, joking in 2016: “You don’t have to really worry about what is really going on in IPOs. People are winning lotteries every day… ”He took it one step further last year when he said in an interview,“ In 54 years, I don’t think Berkshire has ever bought a new number. ”
It’s important to note that it was probably not Buffett himself who took the initiative, but one of his trusted money managers, Ted Weschler or Todd Combs – either way, it broke. over half a century of tradition at Berkshire Hathaway. If such respected investors think Snowflake is a buy, the company gets an additional boost in credibility.
Is it worth it?
Given the rate of stratospheric growth, the secular strong winds of cloud computing, and the support of Buffett (indirectly) and Salesforce, I could break my own rule and invest in the Snowflake IPO. While there are still plenty of reasons to stay away, Snowflake has a few things going for it that other recent and upcoming debuts just can’t match.
I understand that the business is not yet profitable and falls squarely into the high risk and high return category. As such – even if I invest on the day of the IPO – it would still be with a very small amount of money, proportional to the higher degree of risk.