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Snowflake’s Record IPO Shows Investors Are Chasing Growth At Any Cost

By Investing.com (Haris Anwar/Investing.com)Stock MarketsSep 18, 2020 10:07AM ET
www.investing.com/analysis/snowflakes-record-ipo-shows-investors-chasing-growth-at-any-cost-200537973
Snowflake’s Record IPO Shows Investors Are Chasing Growth At Any Cost
By Investing.com (Haris Anwar/Investing.com)   |  Sep 18, 2020 10:07AM ET
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There is no sure way to predict a bubble in the making for any asset class, but there are some fairly similar warning signs that emerge before the value of an asset inflates beyond realistic norms. The latest evidence of a possible bubble forming comes from the eye-popping success of certain initial public offerings (IPOs).

The most recent of these is the cloud-data software maker Snowflake (NYSE:SNOW), whose first-day trading increase doubled its IPO price. That 104% gain at the opening bell was the third-highest pop for an IPO of $1 billion or more on a U.S. exchange, and the biggest since Florida-based equipment rental company Herc Holdings (NYSE:HRI) went public in 2006, according to Bloomberg data.

Snowflake Chart.
Snowflake Chart.

The same day, Jfrog (NASDAQ:FROG), which makes tools for software developers, popped 47% in its trading debut after its initial public offering raised $509 million. Besides these two recent examples, there've been many IPOs this year that showed how investors are lining up to get the piece of what they hope could possibly be the next Zoom (NASDAQ:ZM) or Amazon (NASDAQ:AMZN).

Biotech firm CureVac (NASDAQ:CVAC) soared 249% on the first day of trading, while software-as-a-service firm Bigcommerce (NASDAQ:BIGC) gained 201% and biotech firm Berkeley Lights (NASDAQ:BLI) surged 197%.

Investors’ insatiable appetite for growth and the easy monetary conditions are perhaps the two biggest reasons these IPOs had a field day. The historic first-day pop has been about 14% for an IPO. This year, that average is 36%, according to IPO tracker Renaissance Capital.

Long-Term Viability

Of course, it’s almost impossible to predict which of these companies will be successful and which will leave their investors in trouble. History, however, tells us that an IPO’s early success is no guarantee of the company’s long-term viability.

A Bloomberg analysis of companies that debuted since the financial crisis and popped more than 100% in their first day of trading shows that most stocks have fallen since their initial surge. According to Renaissance research, published by CNBC.com, the 11 other IPOs this year that have popped more than 100% on the first day have averaged a negative 1% return from the first-day close.

The usual culprit in any IPO’s debacle has been the cash-burn that investors initially ignore, as these companies show a debt-laden path to growth. Snowflake, for example, is a great business with a strong growth momentum, but the company has yet to make a profit and still burns cash.  

And investors’ buying frenzy fuelled its market cap to more than $70 billion, six times higher than what it received in a private funding round in February. That means the management is now under a lot of pressure to perform as Wednesday’s price action has valued the company at more than 70 times of forward sales. Zoom Video, one of the most successful IPOs of the past year, trades at just 40 times forward sales.

Bottom Line

Investing in IPOs can be a successful bet in the short-run, especially when a lot of money is chasing a few new ideas, but that initial euphoria may not last forever. Investors should consider these opportunities with a healthy amount of skepticism. Their stock prices can’t continue growing at a torrid pace forever and these companies have a tough road ahead to show sustainable profitability.

Snowflake’s Record IPO Shows Investors Are Chasing Growth At Any Cost
 

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Snowflake’s Record IPO Shows Investors Are Chasing Growth At Any Cost

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Comments (4)
Easy Trade
Easy Trade Sep 19, 2020 12:49PM ET
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If you didn't buy and sell within the first 30 minutes of the IPO, or you had no access to shares pre-IPO, you basically already missed the boat. The market is getting faster and faster, because there's just so much excess money that needs to be put to work. Seconds matter in this market, you can lose/gain 10% in seconds.
Earl castelo
Earl castelo Sep 18, 2020 12:21PM ET
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Snow has great potential but extremely overvalued. It's is proven most if not all IPO lose 20-40% value and may take years to break even. Snow is great buy sub $100 even then your paying a premium.
Ann Frank
Ann Frank Sep 18, 2020 6:42AM ET
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Purchased at 272.. waiting to average it to feel better
Collins Adinda
Collins Adinda Sep 18, 2020 3:51AM ET
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Some of these companies are over valued despite having great growth potential.Will wait when the price goes really down.
 
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