Snowflake had the biggest software IPO ever, and it reveals a problem with IPOs
Investors didn't flake... on Snowflake's IPO. The cloud company went public on the NYSE on Tuesday, trading under ticker “SNOW” (cuutee). The only thing cute about Snowflake is its name. The actual business is about offering cloud-based data management and analytics.
- Snowflake stock more than doubled on its 1st trading day, giving the company a massive $70B market value.
- Then the stock fell 10% yesterday. It's growing fast as revenues doubled from last year, but... it's still unprofitable.
Snowflake = Ariana Grande?... Companies that do a traditional IPO (like Snowflake) hire investment banks like Goldman Sachs to underwrite their new stock offering. Underwriters take on risk, decide the IPO value, and essentially act as talent managers for the stock star: they go on tour (aka: "roadshow") to build interest from institutional investors like mutual funds and brokerages. Those VIP investors are the ones who actually buy the stock "initially" during its Initial Public Offering.
Traditional IPOs have some downsides... Snowflake raised $3.4B in new money for itself by selling stock at its IPO price of $120. It was the biggest software IPO ever. Buuuut: only VIP institutional investors got to buy shares at $120. Then, they unleashed them on the market for the rest of us...
- Retail investors missed out on a big price jump. By the time Snowflake hit the market, it was trading at $245 on pent-up demand.
- Snowflake missed out on raising more money by selling at a higher stock price. After it sold stock for $120, Snowflake didn't benefit directly when the stock soared to $245.
- Institutional investors doubled their money in a day. The IPO seems to have been under-priced, allowing them to sit back and watch their newly bought stock rise.
- That's one reason private companies are increasingly looking at SPACs and Direct Listings as alternatives to the IPO status quo.