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Snowflake, JFrog Have Sophomore Slump as Stock Markets Slide

By Dan Caplinger – Sep 17, 2020 at 12:07PM

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Thursday's second-day trading wasn't quite as exciting as the opening sessions.

The stock market has seen increased volatility lately as the long summer rally appears to be giving way to a more turbulent environment. Today, investors were on the defensive, reacting to comments from Fed Chair Jerome Powell about the likely future path of interest rates and the U.S. economy. Just after 11 a.m. EDT, the Dow Jones Industrial Average (^DJI -0.56%) was down 48 points to 27,985. The S&P 500 (^GSPC -0.09%) lost 20 points to 3,365, and the Nasdaq Composite (^IXIC) sank 106 points to 10,945.

IPOs have gotten a lot of attention, and two in particular came flying out of the gate yesterday. Both Snowflake (SNOW 7.80%) and JFrog (FROG 3.55%) enjoyed big gains on their first days of trading, but on Thursday, their shares are sliding back downward. Investors will have to figure out whether the high-growth tech companies are worth the elevated prices that they'll have to pay for shares.

Letters IPO spelled in white mosaic tile against yellow tile background.

Image source: Getty Images.

Snowflake drifts lower

Shares of Snowflake were down about 7% on Thursday morning. That would ordinarily be a significant slump, but in the context of the cloud data management company's first-day move higher, few have any right to complain.

It took several hours on Wednesday before ordinary investors got their chance to jump in on Snowflake, but once the doors opened, it looked like a stampeding crowd of holiday shoppers on Black Friday. When the stock finally did open, Snowflake more than doubled from its $120 IPO price and closed above $250 per share.

Not everyone's convinced that Snowflake is as strong as its first-day $60 billion market capitalization would suggest. Indeed, former Snowflake CEO Bob Muglia was more than happy to sell off a huge portion of his stake in the company, with Berkshire Hathaway (BRK.A -0.67%) (BRK.B -0.87%) buying more than 4 million shares in a private transaction.

Yet many are intrigued by Snowflake's technology and growing client list. In some investors' eyes, Snowflake is following the same path as other highly successful tech stocks in the cloud computing arena.

A giant leap for JFrog

Elsewhere, JFrog had to settle for just a 47% rise on its first day. The stock opened down almost 7% but battled back to just a 2% decline by 11 a.m. EDT.

The software development tool maker got a lot of attention right from its initial preliminary IPO filing with the U.S. Securities and Exchange Commission in late August. One key technology that JFrog offers is the ability to have software updates automatically implemented for users. About three-quarters of all companies listed on the Fortune 100 are among JFrog's clients.

Solid growth rates and strong loyalty among existing customers have helped give investors a good impression of JFrog. The tech company has even managed to grow enough to approach break-even earnings, which is rare for a business growing at the pace JFrog is right now.

Is there more upside for Snowflake and JFrog?

Bullish investors believe that it's not really possible to use standard valuation tools on software-as-a-service (SaaS) companies. Judging from the past success of other SaaS stocks, that seems like a more reasonable conclusion than usual.

One thing's certain, though: Companies are leaving a lot of money on the table for Wall Street and its favored IPO investors to pick up. Everyone likes first-day hype, but at some point, ordinary investors will lose patience with the IPO process and demand a fairer alternative.

Dan Caplinger owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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