Transcription:
Paul Winkler: Okay. So let’s talk about something. This is a topic of conversation this week: IPO.
Jim Wood: The thing about, you know, IPO is that it’s going to be the next, get rich, quick scheme.
Understanding how IPO’s work
Paul Winkler: They do think that now what they don’t understand is how IPO’s work and what’s really going on. So I thought we’d just give you a little bit of the rest of the story as the late Paul Harvey used to say, “So snowflake, this is a company. They’re a cloud software startup, and they had an IPO, initial public offering. You know, when you have a company raising money for operations, they will do an initial public offering. You know, if they borrow money, it’s a bond right now. If you buy stock, typically you’re buying in a secondary market.
So you’re buying off of some other person that happened to own the stock before you. So the company, you know, when you hear people say, I want to, I like this company. I want to help them out. I want to buy their stock. They don’t realize that that’s not the way it works. You’re not helping them out and least, but unless it’s an IPO, you could be helping them. Now, what would happen in this particular instance, which is interesting is this same thing, sword stocks, the shares of this data warehousing company, they closed at $250, $393, you know, on the IPO day.
Right? And that was more than double the IPO price of $120. So what happens? You’ll have these, you’ll have these underwriters and they will set a price because they’re trying to raise as much money for the company as they possibly can, but they don’t want to set the price so high that nobody wants to buy it. So it’s a tricky little balancing act. And in essence, what they did is they set the price at $120 and it was like, the people came out of the woodwork and said, Oh my goodness. I just think this is going to be the next, you know, I don’t know what they think it is. Some next maybe Zoom or something like that. I’m not sure exactly what they thought it was going to be. So they bid it up and it went as high as it closed at $253. And it went as high as $319 during the course of the session. And I had somebody ask me about that. I said, you know, “it’d been really, really great if you were the person that bought it at $120 and what happens, you’ll have a few people that get in, you know, sometimes it’s, they’re just assigned some shares and they’re just allowed to do it.
And it can be one of those things where it’s a popularity contest, like, you know, Berkshire Hathaway got some salesforce.com got some, and they were able to buy it at the $120 price. And that’s how I was trying to explain is it’s really great if you’re them, because you buy it for $120 and it soars up to $253, and you know, if you are able to sell it, then you can actually sell it for, and you can sell it to whoever you can go sell it to. And, you know, $253, man, you got a bunch of money now for Berkshire Hathaway.
It’s just about nothing. It’s a drop in the bucket for them. So, you know, you’ll look at it and go, well, see, look at that, that just proves that those guys are really great investors and they’re just nailing it out of the park. But you know, you look at the amount of money that they have, or the value of those shares at Berkshire. And, you know, you take a company like this and it’s just like, you know, it’s like going to the bathroom on a forest fire. It’s really nothing in the scheme of things, but what’s really interesting is now they’re saying this puts the pressure on us.
Frank Slootman, Snowflakes Chief Executive says, this puts some pressure on us. We got to come through and we got to actually justify this price that is being paid for our stock. And here’s the deal. When it comes down to revenue growth, this company got a lot of people excited because they had triple digit revenue growth. Right? The problem is that they also had extremely high losses and the losses are multiplying. So they’ve got to come through and its losses.
I mean, they’ve got money coming in, but their expenses exceed the money coming in. So in order for this price to be justified, they’ve got to get those costs down. You have to have the revenue that keeps going up in order for the price of the stock to get to some range, which is fairly normal for a company like this. You know? So you look at this stuff and, and IPO’s can be problematic.
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Can you have success with an IPO?
Jim Wood: Well, IPO is in general, just, you know, they’re there, you’ll always hear the success stories and you’ll hear the big numbers. Like it came out of $120 and it zoomed up to $319. What you don’t hear is the long term average record of IPO’s, which is that they are poor investments that they usually lose money. Yeah. As a group. Absolutely. What made me kind of laugh is just the name Snowflake in today’s climate. Because before I knew anything about what they did, I was just trying to think of what a company called Snowflake does. And the only thing I could come up with is maybe they build safe spaces.
Paul Winkler: They’re going to have a meltdown is what they’re gonna have because you know, after the yeah, right. See you soon after a company comes out. And here’s the thing who benefits from this. Again, it is that entity that bought the shares at the price that it was set at the beginning. Now I saw someplace, I don’t remember where the heck it was, but this is one of the biggest losses of revenue for the company that has been out there. In other words, when they, they get the $120 and then they get to opera.
But you know, when those shares are bought, think about it. If Berkshire buys it for $120 and it goes up to $253 who gets the other $133, well, it’s not Snowflake. It is Berkshire. They’re the ones that benefit from that. So you think about that when you’re raising capital to run a company, you’re raising money to run that company, you get the money from the sheriffs because you’re selling the opportunity to own a part of the company.
What did they sell those shares for $120? What happened? Somebody bought it for $120 in this case, Berkshire in Salesforce. And then what happened is when it went up to the new pro, well, who got that money? Well, Salesforce and Berkshire, or whoever sold the shares. Now they weren’t the only ones that got the initial allocation of shares. There are other people in entities that got allocation. So I want you to get that they didn’t necessarily benefit from this, nor do you benefit from it.
If you’re the one that goes out there and go, Man, I just have to own this company. Because you’re going to be that one that pays. And some people, I mean, I feel sorry for them in a way, some people went out there and paid that $319 per share. Because that’s what the price went up to. And then of course at close to $253, so it was probably the quickest loss they ever suffered in their life where it just bam, you know, it’s just easy come easy go.
But no. So I just wanted to understand. Because typically the first nine months some studies have said they actually typically lose money. So if you’re a buyer, it’s one of those things that when I’m looking for mutual funds, I look for funds that don’t engage in buying IPO’s.
Paul Winkler, along with Jim Wood on the Investor Coaching Show.
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