IPO Like 1999: Market Reaches Dot-Com Expansion Levels As Snowflake and Other Cloud Software Stocks Continue to Crop

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As the importance of cloud software has increased in the global pandemic, cloud software companies have become the most prominent example of initial public offerings reaching dot-com boom levels – and beyond.

Two cloud-based software companies debuted on Wall Street on Wednesday, virtually ringing their respective trade bell and then seeing their stocks soar in a way that would have stood out even in 1999. Snowflake Inc. SNOW,
-10,39%
attracted a record amount for a software company, and stocks climbed nearly 112% on their first day on the New York Stock Exchange to reach a market value of over $ 70 billion. DealLogic said Snowflake had the highest valuation of a company to double its price when it first debuted in the market, based on data dating back to 1995.

Matthew Kennedy, senior market strategist at Renaissance Capital, which manages the IPOs of two IPO-focused ETFs,
-0,42% IPOS,
-2,91%,
said there had been no IPO that had raised more than $ 1 billion to double on its first day of trading since 2000; Snowflake has probably raised over $ 4 billion. The closest comparisons this year, he said, would be BigCommerce Holdings BIGC,
-7,78%,
which climbed 201% in August, and nCino Inc. NCNO,
-1,87%
which jumped 195% in July.

Snowflake wasn’t alone in the software business this week. JFrog Ltd. FROG,
-0,50%,
a service that allows companies to quickly and transparently release their software upgrades to all of their users and / or employees, debuted on Nasdaq on Wednesday. Like Snowflake, the company increased its IPO range and priced above the high target, then saw stocks jump in their early days, albeit to a lesser extent. Later Wednesday, cloud-based AI software developer Sumo Logic Inc. SUMO,
+ 22,18%
IPO price higher than projected range, and shares jumped more than 20% to open Thursday, and Unity Software Inc. U,

, a platform for developing 3D content, including video games, is expected to be priced Thursday night.

Read more: Snowflake was on fire and JFrog took a big leap in its market debut

In Snowflake’s case, investors were clearly excited about the company’s market, where its cloud-based data platform competes with cloud service providers and legacy database software vendors like Oracle Corp. ORCL,
-0,41%.
They were also excited to be part of a deal alongside Berkshire Hathaway Corp. BRK.A by Warren Buffett,
-1,03%

BRK.B,
-0,70%
– generally opposed to both tech companies and IPOs – as well as Salesforce.com Inc. CRM,
-2,42%.
The two companies bought 250 million shares at the IPO price, while Berkshire bought an additional 4 million shares from the former chief executive of Snowflake.

See also: Five things to know about the IPO of Snowflake recording software

The COVID-19 pandemic has also given a boost to cloud software companies, as companies seek to deploy and strengthen already existing relationships with businesses that can help employees maintain productivity while working from home. JFrog, like Zoom Video Inc. ZM,
+ 1,21%,
saw a huge surge in interest in the pandemic, although leaders said more time was needed to reach deals. JFrog’s 5,800 paying customers come from giant tech companies like Microsoft Corp. MSFT,
-1,04%
to financial institutions such as American Express Co. AXP,
-1,24%
et Morgan Stanley MS,
-1,76%
to industrial companies.

“Software is becoming an integral part of our lives, and COVID has just crystallized the need for digital transformation,” Jacob Shulman, CFO of JFrog, said in an interview Wednesday afternoon. “This is where our products help customers.”

It’s not just software, however – the IPO market has seen a major disruption this year. Jay Ritter, Cordell’s leading researcher in the University of Florida’s finance department, said that excluding this week, the first-day IPO returns so far this year have averaged around 42% – “the highest average since the Internet bubble. ”

A big difference from public companies in 1999-2000, noted Ritter, is that many of these young Internet companies had very little income.

“While this year almost every tech company, like Snowflake, is making significant sales,” he said. “They’re older, they’ve shown they have a product or service that sells and while a lot of them aren’t profitable yet, they’ve shown they’re not just vaporware.

As of 2015: Why this tech boom is different from the dot-com bubble

Ritter pointed out that Snowflake also achieved another near-record: for the money left on the table by the company, referring to the gap between the funds raised in the offering going to the company and the surge in the stock after its start. trading in the open market.

“It looks like it’s going to be in the neighborhood of $ 4 billion, right after Visa,” which left $ 5.075 billion on the table when it went public in 2008 of 406 million shares, Ritter said. Snowflake only offered 28 million shares.

“The market is really paying for growth,” Ritter said. “Is the market paying too much? It is really hard to say that they are paying too little. ”

For investors who want to take advantage of these top-notch cloud companies, it’s impossible to pay less. But that sounds a lot like the hysteria of tech startups and their promises of growth in 1999.

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