Snowflake’s IPO: Are there any gains left for regular investors?

Snowflake's [SNOW] IPO last week was huge. So huge that in the space of a single day Snowflake’s share price jumped 112%, doubling the value of early backers’ shares, who had been allocated them at $120 a pop. By the end of the day, Snowflake’s share price was trading at $245, giving it a market cap of $71bn.

So have retail investors missed out by skipping Snowflake’s IPO, or are there more gains to come?

What happened during Snowflake’s IPO?

For early backers, Snowflake's soaring share price is a win, even if it did drop 10% the day after going public. Among those initial investors are Berkshire Hathaway and Salesforce, each picking up $250m worth of stock at Snowflake’s IPO.

Yet for the retail investor, this isn’t necessarily a good thing. Like all companies, when the cloud data firm went public, it offered stock to institutional investors at Snowflake’s IPO price via an investment bank. Retail investors have to wait until a stock goes public to pick up shares. So when Snowflake's share price jumped, it was the institutions who profited, rather than everyday investors.

Retail investors aren't the only ones who might have missed out on Snowflake’s IPO. The fact its share price doubled so quickly means it could have been undervalued at the time of the IPO, suggesting it might have left some money on the table.

According to CNBC, if Snowflake’s IPO had been priced closer to the amount the broader market was willing to pay, it could have made $3.8bn. That's on top of the $4bn Snowflake made in its IPO and private placements.

Is Snowflake’s share price a buy?

Cloud-based Software as a Service offerings aren't anything new — Amazon [AMZN], Microsoft [MSFT] and Alphabet [GOOGL] all offer similar services — but what makes Snowflake different is that it can run on any of these cloud platforms. That’s a unique selling point as companies often use more than one provider for their cloud services.

Snowflake can also be scaled up or down as needed, which means it can charge depending on usage, rather than a flat fee. This has seen Snowflake add new clients at a remarkable rate. Last year it upped its client count from 948 to 2,392, while this year it has added 800 more, taking the total above 3,100.

Revenue growth has also been strong, jumping 175% in the year ending 31 January, from $96.7m to $264.7m. Sales in the first six months of 2020 have been similarly promising, going from $104m to $242m.

However, losses have also grown to $348.5m compared to the last fiscal year’s $178m. According to the Financial Times’ Richard Waters, the scale of the IPO is out of sync with the company's fundamentals:

“...a market valuation of about $70bn after the first day of trading — or 140 times its current annualised revenues, and nearly six times what the company was judged to be worth in a private fundraising round earlier this year — is head-scratching.”

Beyond Snowflake’s IPO, Waters highlights the competition that the firm will face from Amazon, Google and Microsoft, which already have a formidable hold on the market and aren’t known for playing nicely with the competition.

Where next for Snowflake’s share price?

Since Snowflake’s IPO, its share price has oscillated between $240 and $220 and closed 22 September at $235.16. Whether it can continue to add new customers while fending off the competition remains to be seen. For investors, it could be worth waiting for the heat around Snowflake’s IPO to die down before taking a considered position on the stock.

As CMC analyst Michael Hewson explains:

“The big question now in an age of big data is whether Snowflake can continue its recent stellar progress, and growth of new clients, or whether the interest that’s been shown in the past few days starts to melt away.”