The winner and new champion? Snowflake (SNOW) .
That's right, Wednesday's IPO of this incredibly fast-growing software company was the largest in software history, raising, $3.3 billion and racking up a valuation of about $69 billion -- more than double where it came public. It was a stunning success for the shareholders, both those who have been in it during its period of aggressive growth as a private company and those who got in on the deal at $120 a share.
But you know who may be the losers?
Everybody else. Because now we saw the beginning of what might be an epic deluge of new stock from companies that are currently private and have been eager to cash out for ages. Many of them are exciting companies with a great story, a story like Airbnb, which is cleaning up as hotels seem to be running into the ground with debt and without customers. There's Palaentir, the security company. And perhaps Stripe, the financial services company that I know so many want in on. Or GoodRx, which saves you fortunes on prescription drugs. And countless companies that their managers most likely thought they could never raise enough money to grow, let alone survive.
How many will there be?
The answer? Too many, because there is not enough institutional cash to handle all of that stock.
Let me explain.
Big institutions wanted in on this stock. They wanted in so badly that they had to raise cash to do so. A half million share position in a company like Snowflake -- the minimum size a large institution needs to move the needle, costs a huge amount of money. Sure, they might have been able to get 100,000 or maybe even 200,000 shares on the offering price, but if they want to remain on the good side of the brokers, they will most likely average it up to get to $500. Given the low basis that came from the deal stock, they have a much better total price than if they bought all of it in the open market, so they are thrilled.
There's only one problem. Given that they don't have that cash, they have to sell stock to put the money to work, and in this case, because they most likely didn't think there would be a double, they were frantically raising money when they got their allocation. That's why you saw all the similarly high-price-to-sales model stocks get punched in the kisser almost immediately. Adobe (ADBE) , for example, announced an excellent quarter, but it had the misfortune of reporting on a day when Snowflake accumulators needed dough. ServiceNow (NOW) got whacked on what was otherwise an up day. So did Zoom Video (ZM) , Crowdstrike (CRWD) and Zscaler ZS and so many others, including fin techs like Paypal (PYPL) and Square (SQ) .
Of the high-multiple expensive stocks, only Salesforce.com (CRM) didn't get laid to waste, and that could be because Marc Benioff's company got $250 million worth of stock on the deal. Nice work if you can get it. I wonder if he took the profit.
If almost all of these stocks ultimately bounced back, then what's the worry?
It's the progression. The best, Snowflake, goes first. Then the next best and the one after that and so on. By the end of the skein, there's no more money and the worst of the worst are coming public.
And that's when things turn ugly. People always ask what kills a bull market and I say it's easy: too much supply. Mark this day down. It's the beginning of a trend that will ultimately bring you some of the worst merchandise at the same time that insiders are unlocked and can join in the sell party.
No, we don't have to worry yet. But yes, I now expect this demanding bull to succumb to too much supply, because the gains that came from today's underwriting are just too compelling for any private companies' investors to resist.