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Snowflake shares fly at IPO – is it a good investment?

Posted: 18 September 2020 2:00 pm
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Warren Buffet backs it, but is it too late to get on board?

  • Warren Buffet and Salesforce invested US$250m each ahead of IPO
  • Snowflake's share price more than doubled on NYSE debut
  • Annual revenue more than doubled from FY19 to FY20
  • Net losses also almost doubled between FY19 and FY20
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If you were lucky enough to get your hands on Snowflake shares during its initial public offering (IPO), you'd now find your holdings worth almost double your purchase price.

Snowflake Inc shares surged 111% from its US$120 IPO price on its first day of trading Wednesday to close at US$253.90. By Thursday, shares had dropped around 10% amid a broader tech sell-off in the US.

Investing in US IPOs is difficult from Australia. Unless you're registered with a participating investment bank or full-service broker, your first opportunity to invest in the company is probably after the stock has already listed on an exchange.

But buying shares in a newly listed company comes with a number of risks. After a company goes public, it's not uncommon for stock prices to surge in the first week amid the hype, only to fall flat shortly after as profit-takers sell out.

Berkshire Hathaway's Warren Buffet has long advised against investing in IPOs for this very reason, which is part of what makes Berkshire Hathaway's US$250 million investment in Snowflake's IPO so extraordinary.

The question now is whether Snowflake has further to run in the coming days.

What we know so far

Snowflake is a cloud data storage firm that was founded in 2012 in San Francisco. It offers a platform that helps businesses to securely store and analyse their data and has around 3,000 customers, including Cisco and Capital One.

The tech company applied to list on the New York Stock Exchange (NYSE) under the ticker "SNOW" back on 24 August. After an initial price guidance of US$100–US$110, its final IPO price landed at US$120 a piece, raising US$3 billion Tuesday in the biggest US listing so far this year.

This means its share price more than doubled on the first day of trading on Wednesday, jumping as high as US$319 around midday before closing at US$253.90.



Is Snowflake a good investment?

Warren Buffet and cloud giant Salesforce seem to think so, with each buying up US$250 million in stocks at a price of US$105 a piece in a private deal ahead of the listing.

Both have clearly made a tidy profit overnight, however the price now offered to the masses is very different to the deal they benefited from.

While still relatively young, Snowflake is clearly fast growing, with annual revenue more than doubling in the last financial year, to US$264.7 million in 2020 from US$96.6 million in fiscal year 2019.

Profit numbers are a different story. In 2020, the company reported net annual losses of US$348.5 million, almost twice as much as the year prior (US$178 million).

By that same token, Q2 results show losses have slimmed. In Q2 2019, the company reported a net loss of US$177.2 million, while in Q2 2020, net losses sat at US$171.2 million.

Regardless, Snowflake is still a non-profitable stock that doesn't pay a dividend. This makes Snowflake a "growth play" rather than an income play and it may not be suitable for anyone nearing retirement as growth stocks tend to be volatile.

Still, with year-on-year revenue growth up an impressive 121% for Q2, its losses clearly haven't dissuaded investors (big or small).

Competition

Cloud storage solution companies have been among the biggest beneficiaries during COVID-19, as companies shift to working from home solutions.

As a cloud platform and data analytics company, Snowflake's competitors include the likes of Amazon, Microsoft and Google.

To make the matter complicated – and the biggest risk factor according to some analysts – Snowflake relies on its main competitors for storage and computing power.

According to CNBC, 85% of Snowflake's workload is situated on Amazon Web Services (AWS), who is also a key rival in data storage software, while the remaining 15% sits with Google Cloud and Microsoft Azure.

By that same token, Snowflake is more than just a cloud storage platform. Its advanced data analytics tools are a favourite among industry figures and considered market leading.

How to invest in Snowflake

Snowflake is already public so it's too late to invest in the IPO itself, though you can buy shares directly from the New York Stock Exchange.

To buy shares listed in the US, you'll need to sign up to a stockbroker that offers US market access. You can either use a full-service broker such as Morgan Stanley or you can go the less expensive route and buy the shares yourself through an online share trading platform, such as eToro.

Before you sign up to the platform, just make sure it offers US stocks. You'll also want to check the brokerage fees (cost per trade) and the foreign exchange fee (the cost to convert currencies).

Disclaimer: This information provided is general in nature only and does not take into account your personal objectives, financial situation or needs. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Past performance is not an indication of future results. Seek professional advice and consider your own personal circumstances before making any decision based on this information.

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