Is It Too Late To Invest In Snowflake?

Warren Buffett-backed Snowflake (NYSE: SNOW) saw shares surge more than 111% in its market debut on the New York Stock Exchange yesterday, making it the largest software IPO ever. The stock began trading at $245 per share and closed at $253.93, having been priced at $120 a day earlier, which was still far higher than the $75 to $85 range it proposed at the beginning of September. Snowflake was worth $70.4 billion at the end of trading, more than five times its $12.4 billion valuation in February. 

Why did it surge so much?

There’s no denying that this eye-watering first-day performance will come as a shock to even the staunchest Snowflake bull, but perhaps we shouldn’t be so surprised. 

This hype train left the station last week when it was reported that Berkshire Hathaway (NYSE: BRK.B) and Salesforce (NYSE: CRM) had each purchased stakes in the company. Snowflake sold 28 million shares to raise $3.36 billion through its offering, and Berkshire Hathaway and Salesforce each agreed to purchase $250 million in shares at the IPO price concurrently, pushing the total to $3.86 billion.

When investors saw that the Oracle of Omaha himself was getting in on this previously relatively unknown cloud storage business, suddenly everybody wanted a piece of the action. A recurringly comic theme among traders on forums such as Reddit and Twitter is that many buyers don’t actually have much of an idea as to what Snowflake actually does.  

Meanwhile, with its valuation more than doubling yesterday, Warren Buffett’s original $250 million investment is up a nifty $800 million after just one day on the market.

Buy now or wait for the dip? 

Here at MyWallSt we’re all about buy and hold, investing what you can, whenever you can. However, the Snowflake scenario is  —  I apologize for using this word once more in 2020 — ‘unprecedented’. 

To put the chaotic situation into context, this extract from investor Charlie Bilello’s blog sums up just how out of whack the Snowflake IPO really was:

Well, its market cap hit a high of $88.4 billion yesterday in its first day of trading. That’s a multiple of 219x sales and a higher market value than 431 companies in the S&P 500 (with lower sales than every S&P 500 member). When Amazon went public in 1997 it was a $442 million company and it only hit an $80 billion market cap in 2011 when its sales were at $40 billion.

Many seasoned investors are unhappy with this turn of events, believing that Snowflake best encapsulates the current overpriced nature of the market which has suddenly become overrun with retail investors, who now make up more than 25% of all trading. FOMO (fear of missing out) and gurus such as Warren Buffett now stoke the fires of these investors, many of whom have little experience investing prior to the March crash, and are diving headfirst into IPOs despite lacking knowledge of the company in question. 

In other words: 

The IPO process is broken! Its a sham.

— Puru Saxena (@saxena_puru) September 16, 2020

On a more optimistic note, the attention around Snowflake’s IPO is a great example of how accelerated cloud-computing adoption is making companies involved in the sector more valuable. During this pandemic where almost our entire livelihood and downtime have moved online, cloud computing has never been more important.

Yes, Snowflake is overpriced right now, there’s no doubt about that. It’s trading at 175x its sales ratio and has become the priciest technology IPO by that metric. It’s certainly a risk to buy in at the current price as I can only see it going down in the short-term. However, as a long-term investment, it could well be a millionaire-maker as the transition to cloud computing looks to be an important part of our society’s future. However, you’re likely to get a better price if you’re a bit patient.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.