The software business is on fire. This is going to be by far the biggest year for software IPOs in history.
Four big software IPOs are pricing this week: Snowflake, Unity Software, JFrog, and Sumo Logic. Palantir and Asana are coming at the end of September.
Snowflake priced its IPO at $120 per share, raising $3.3 billion. Previous price talk over the weekend had been at $75-$85 per share, then raised to $100-$110 per share on Monday.
JFrog priced 11.6 million shares at $44, also above the prior range of $39-$41.
Snowflake is not only the largest IPO of year by money raised, it’s the largest software IPO ever. At $3.3 billion raised, it is more than three times bigger than the next largest, VMware in 2007, which raised $957 million.
Put it all together, counting the four IPOs this week, software IPOs will have raised roughly $7.8 billion year to date, far exceeding the previous high year of $5 billion in 2018, according to Renaissance Capital.
And that doesn’t include Palantir and Asana.
What’s going on?
“Covid and work-from-home has brought home the point that software on-demand services are the future, and all those services rely on cloud services and data analytics,” Santosh Rao, head of research at Manhattan Venture Partners, told me. “These companies provide the plumbing, they are enabling the future economy we are going to have.”
While none of these companies provide unique services, all are tightly focused:
Snowflake does data management. It allows companies to put all their data that’s spread out across many platforms, put it into Snowflake, and make sense of it all.
JFrog does software updating. It continually updates a company’s software platform. They give developers the tools to update their software.
Unity Software does software for 3-D games. Half of the top online games use this platform, and the CEO came from Electronic Arts.
Sumo Logic also does data analysis, but a very specific type. Kathleen Smith from Renaissance Capital calls it “log management.” They help study how customers interact with a company’s website.
Asana does project management software, founded by a Facebook co-founder, Dustin Moskowitz.
With a tsunami of software IPOs at high prices comes the usual worries that valuations are getting out of control. Both Snowflake and JFrog have notably increased the size of their IPO offerings this week.
Snowflake is going public at more than 81 times trailing revenue, Matt Kennedy, senior IPO market strategist for Renaissance Capital, tells me. “People will pay up for growth, regardless of how much they are losing,” he said, noting that Snowflake’s revenues are growing 125 percent in the last quarter, but they are still losing money — free cash flow loss of $132 million in the twelve months ending in July, on revenues of $403 million.
How long can that go on? “You have two potential outcomes,” Kennedy said. “You can follow Datadog, which increased profitability while maintaining growth. Or you could go the way of Cloudera or Slack, both of which did not get more profitable as growth slowed.”
Santosh Rao agrees: “While many are seeing dramatic leaps in revenues, none except JFrog are profitable,” he told me. “But that’s OK; they will get a pass if they continue to show growth, but if they come out of their first quarter and disappoint [on revenue growth], they will get hammered.”
Despite concerns about valuation, demand is big. Kennedy says Renaissance will likely fast-track Snowflake into its Renaissance Capital IPO ETF, a basket of roughly 60 of the most recent IPOs, likely within five days of going public.
Why is there so much demand for these companies? It doesn’t seem like they are offering groundbreaking products, but Rao says that is not the point: “Oracle and Microsoft has many of the products these companies have, but these small companies are more nimble and have a more focused strategy. They will come in and sell you exactly what you need, not a full suite of products.”
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