I never buy a share in an IPO, but Snowflake may be an exception

There is a certain attraction to finding the next big thing, living on the ground floor and riding untold riches. And of course there are investors who feel that the best way to make this dream a reality is their hard-earned cash to work in the next red-hot initial public offering (IPO). Unfortunately, the reality is usually very different, and in most cases the only people who are wealthy are the initial and private investors when a company goes public.

As a long-time investor myself, I’ve made a general rule to avoid buying stocks before making my debut on the public markets – and there are plenty of reasons (I’ll get to some of them in a minute).

That said, I am considering breaking my own rule and putting a small amount of my own money in an upcoming IPO that shows more than the average amount: Snowflake.

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the basics

Snowflake is a cloud data management company that plans to trade its shares on the New York Stock Exchange using the ticker symbol “SNOW”. The company is yet to make its debut, but some reports suggest that the IPO could be on Wednesday like next week.

A recent regulatory filing suggests that Snowflake plans to offer 28 million shares in the range of $ 75 million to $ 85 per share, raising more than $ 2.7 billion for start-ups. The company will be valued at approximately $ 24 billion at the high end of the range.

Too many reasons to avoid an IPO

Individual investors almost never get on an IPO (price), especially when there is a high level of interest such as with Snowflake. This privilege is reserved for investment banks and institutional investors, whose shares have greater access before their public debut. Additionally, IPOs are generally a lot more risky than your average investment, which leads to a great deal of uncertainty due to the lack of a significant track record with these running companies.

There are other possible issues. Just because a company has captured the public imagination will not necessarily be a good investment. Lyft And Uber They were one of the most highly anticipated IPOs in early 2019, when they were debuting within weeks of each other in early 2019, but they failed to stay in the hype. Since their IPOs, Lyft and Uber, have dropped 62% and 12% respectively, early investors have been holding bags.

For every rule, there is an exception

There are many reasons to invest in snowflakes. The first is the company’s eye-popping top-line growth rate, though its track record is low.

For the fiscal year ended January 31, 2020, Snowflake reported revenue of approximately $ 265 million, up 173% year over year. The busy pace of growth continued in the first half of 2020 with revenues of $ 242 million, up 133%. It is worth noting that revenue for the first six months of this year is all equal to the previous year – which is saying something. It is also important to note that the company’s bottom line is still solid in the red, as its net loss of $ 349 million was eroded last year from a loss of $ 178 million during the prior year. There was an improvement over the past six months, however, with Snowflake reducing its losses from $ 177 million to $ 171 million in the prior-year period.

there’s more. Just this week, Snowflake revealed the existence of a pair of high-profile backers for his public debut. Warren Buffett Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) And salesforce.com (NYSE: CRM) Each has agreed to invest $ 250 million in the company using concurrent private placements at a price equal to the final IPO price. In addition, Berkshire will also purchase an additional 4 million shares from the former CEO of Snowflake in a private transaction, also paying the price of the IPO. This could increase Buffett’s total investment to over $ 500 million.

The letter IPO superimposed on a stack of $ 100 bills.

Image Source: Getty Image

Salesforce Ventures, the investment arm of the tech giant, has a fairly impressive track record for investing in early-stage tech start-ups. Company has previously invested Zoom video communication, Twilio, And DocuSign, Each of which has been highly successful since its public debut.

Warren Buffett said while away from the IPO in 2016, “You don’t really have to worry about what’s really happening in the IPO. People win the lottery every day …” He said in an interview last year as well Was. “In 54 years, I don’t think Berkshire has ever bought a new issue.”

It is important to note that it is probably not Buffett who made the move, but one of his trusted money managers, Ted Weschler or Todd Coombs – regardless, it broke more than half a century of tradition at Berkshire Hathaway is. If such highly respected investors feel that Snowflake is a purchase, the company gets an extra boost of credibility.

Is it worth the risk?

Given the stratospheric growth rate, strong secularization for cloud computing, and support from both Buffet (indirectly) and Salesforce It is possible Break my own rules and invest in Snowflake’s IPO. While there are still plenty of reasons, Snowflake has a few things going for it that may not match the recent up-and-coming debut.

I understand that the company is not yet profitable, and falls into the category of high-risk, high-reward. Like – even if I invest on IPO day – it will still be with a very Commuted with small amount of money, high level of risk.