Snowflake’s big stock pop shows challenges of IPO pricing

Snowflake drew so much investor interest in its stock-market debut on Wednesday that it saw a temporary halt in trading for volatility.  Its opening price made it the third-biggest pop for a US IPO of more than $1 billion, raising questions about the seeming mismatch between what banks said the […]

  • Snowflake drew so much investor interest in its stock-market debut on Wednesday that it saw a temporary halt in trading for volatility. 
  • Its opening price made it the third-biggest pop for a US IPO of more than $1 billion, raising questions about the seeming mismatch between what banks said the company was worth and how the market reacted. 
  • “It’s hard to control these once-in-a-generation assets,” one banker who worked on the IPO said.  
  • Another tech company, Unity, tested out a different pricing process ahead of its Friday stock-market debut.
  • Visit Business Insider’s homepage for more stories.

Editor’s note: This story was updated with information about Unity’s first day of trading.

Snowflake’s initial public offering raised billions — and questions about why the data-warehouse company’s shares popped so much in their public debut. 

The company saw its stock open on Wednesday at $245 per share, more than double its IPO price. Its opening price made it the third-biggest pop for a US IPO of more than $1 billion and the biggest since 2006, according to Bloomberg data.

After opening on the New York Stock Exchange, the stock soared by as much as 165% on Wednesday, eventually closing at $254. Trading in the stock was halted shortly after the opening because of volatility.

“This is just one day. Things will normalize and shake out and become more settled as time moves on,” Snowflake CEO Frank Slootman told Reuters.

Ahead of trading, Snowflake sold 28 million shares at $120 each, pricing the stock above its previous range amid strong investor demand. Snowflake’s trading debut garnered Wall Street enthusiasm earlier in the month after the legendary investor Warren Buffett pledged to invest more than $550 million in the company following its IPO.

Investment bankers often say that pricing an IPO is more of an art than a science, but the major pop could further inflame the debates about whether direct listings better benefit existing investors.

Bankers spend a significant amount of time playing matchmaker, trying to land on the right share price for both prospective investors and exiting shareholders before the IPO. In Snowflake’s case, Slootman spent a year talking to institutional investors, Bloomberg reported. Ultimately, a company’s management and board — not the bankers — have final say over IPO pricing.

A spokeswoman for Goldman Sachs, the lead banker on Snowflake’s IPO, declined to comment. 

One banker on the IPO said there was “unlimited demand” for Snowflake by investors who expect it still has much more room to grow. The banker spoke on condition of anonymity because he wasn’t authorized to speak publicly on the matter.

“It’s already at scale but still growing like a startup,” the banker said. “A deal of this size when people can put on real positions is perfect for large-cap growth funds … It’s like taking Amazon or Netflix public — nobody wants to miss out.”

He said he wasn’t worried about what Wednesday’s pop signaled for future tech offerings. 

“It’s hard to control these once-in-a-generation assets,” he added.

Another banker involved said institutional investors liked the combination of Snowflake’s business and seasoned management team. He said investors were loath to sell, thinking it would be the cheapest they could buy Snowflake stock. The few who did sell likely saw their stock trade hands at a high velocity on Wednesday, with retail investors and day traders — who have proliferated during the pandemic — repeatedly trading Snowflake stock to eke out small gains, adding to the volatility.

Read more: The IPO market is on fire after a short-lived drought — here are the hottest public debuts to keep an eye on, and which banks are eyeing big fees for pulling them off.

Snowflake’s IPO came two days ahead of another widely anticipated offering from the video game creation software maker Unity, which priced Thursday night in a much different process. In collaboration with Lise Buyer, a consultant who architected Google’s auction in its unconventional 2004 IPO, Goldman Sachs and Credit Suisse oversaw a modified auction that was set up to help prevent a price spike so that the company could get a better sense of interest ahead of time.

Unity sold shares at $52 apiece, well above its initial range of $34 to $42, and the stock opened on Friday at $76.

Investors could bid multiple times at different prices, and unlike Google’s auction, in which a computer allocated shares, the company decided how to dole out stock, a person familiar with the process said. In addition to helping control price and its investor base, Unity’s process was meant to help measure investor interest. 

The Financial Times first reported Unity’s plans last week.

Huge pop highlights critique about money left on the table

When newly public companies see a huge jump, or “pop,” in their opening prices, like Snowflake and Lemonade in its July debut, critics of the traditional IPO process say that existing investors have been shortchanged. Banks sometimes underprice the shares doled out to institutional investors and select wealthy people so the stock will rise a bit in the first day of trading, which often attracts more media coverage and underscores investors’ interest in the company.

But if they underprice by too much, the stock may climb significantly, leading selling shareholders to wonder if they left money on the table. 

Benchmark Capital partner Bill Gurley, one of the most outspoken venture capitalists about what he sees as failings in the IPO process, has championed direct listings to mitigate some of the issues surrounding IPOs.

Read more: Big investors have been slashing valuations on stakes in private companies like Palantir and Sweetgreen. But bankers say there could be a quick fix.

After the market closed on Wednesday, he wrote that Snowflake “is the final proof of just how broken process is. Frank Slootman is a HIGHLY experienced IPO CEO. He knows the game, & pushed hard to make sure he wasn’t short-changing the company. But it didn’t matter, because the process is set up to deliver this silliness.” 

Snowflake’s meteoric stock climb didn’t stop analysts from speculating about even bigger jumps. On Thursday, King Lip, the chief strategist at Baker Avenue Asset Management, told CNBC that Snowflake shares could “double from here” if it performed well enough to outdo its rival Oracle.

“If the growth continues, the valuation may actually look cheap at current levels,” he said. 

Founded in 2012, Snowflake became a major player in cloud-data warehousing, which became a hot market with the rapid growth of the cloud, the enterprise trend in which businesses set up networks on web-based platforms.

Snowflake reported that its revenue jumped to $264.7 million in 2020 from $97 million in 2019. But its losses ballooned to $348.5 million from $178 million in the same period.

The company raised $479 million in February at a $12.4 billion valuation. In total, it has raised $1.4 billion from investors including Sequoia and Iconiq Capital. The company also got a pre-IPO boost from new investments from Buffett and Salesforce.

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