Snowflake, a cloud-based warehousing firm working towards an IPO, was valuated at $75 to $85 dollar per share early in September. Later, as anticipation grew, analysts expected a valuation of $100 to $110 dollar. When the company’s IPO took place the 16th of September, it priced its own shares at $120 each. Demand was so strong however that the stock quickly shot up to $245 dollar (an incredible 96% increase). The stock has come down a bit but still stands at $240 a share (19-09).
This has made it the biggest IPO for a software company in history. The current market valuation of $70bn is 140 times larger than its current annual revenue. Such incredible valuations seem to be based on unlimited faith in the companies’ future performance. It reminds one of the dot com bubble in the late 90’s where anything ‘dot-com’ related was valuated positively, regardless of underlying business performance.
While Snowflake has seen significant business growth and solid performance over the past years, investors seem to only look at the upside. A quick look at the competition in the cloud-warehousing should be enough to be at least a bit skeptical: Amazon, Google and Microsoft are all battling for market-share.
Other tech-stocks, like Apple and Microsoft have been soaring as well. One explanation for this is that they were helped by the pandemic, increasing the need for IT-solutions. These are established companies that have been growing steadily over many years now however.
With the S&P 500 (tracker of US stocks) showing pre-Covid levels and the unemployment rate relatively high, it is clear that the market has already lost its touch with the underlying economy.
I am not going to argue that tech has proved its importance during the pandemic so the rise in certain tech-stocks seems validated. The question is, is the current faith and validation in companies like Snowflake still justified? Or are we seeing a second dot-com bubble ready to burst?
What do you think? Is this another tech-bubble waiting to burst or is it fundamentally different this time? Let me know in the comments!
Sources and references:
https://www.ft.com/content/e9ecee89-491e-4495-9b18-61d9e86dab1b
https://edition.cnn.com/2020/09/16/investing/snowflake-ipo/index.html
https://www.snowflake.com/
https://www.ft.com/content/844ed28c-8074-4856-bde0-20f3bf4cd8f0
https://www.bls.gov/news.release/pdf/empsit.pdf
