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Databricks stock could be trading publicly as early as this year or as late as next year. Whatever the case, it's important to get ahead of this thing now.
Databricks is worth $28 billion. That makes it one of the most valuable private tech companies in existence.
People are comparing it to Snowflake Inc. (NYSE: SNOW). It was the largest software IPO in history when it went public in September 2020. If you were around for that, you know that means the Databricks stock price could spike in the blink of an eye.
Snowflake shares were at $120 at its IPO and quickly increased to $245 - a 104% gain for IPO investors. The company sold 28 million shares and raised nearly $3.4 billion from the IPO.
There's something different about this Databricks opportunity, however. And that's what we're going to talk about today.
What Is Databricks?
Databricks is an enterprise software company that makes different open-source data engineering and machine learning solutions. The founders originally created Apache Spark, an analytics engine for processing large amounts of data.
One of Databricks' biggest projects is developing a web-based platform for using Spark. The company also offers online courses and runs conferences for Spark.
Databricks growth right now is driven by its software architecture, called "lakehouse." Lakehouse allows organizations to avoid the high cost of rebuilding older data systems from the ground up. Instead, data teams can collaborate and innovate through a cloud connection.
Simply put, it saves companies lots of money.
Databricks has over 5,000 customers worldwide using its open-source software.
Wall Street is looking forward to whenever this company decides to trade publicly, though a Databricks IPO date is still unconfirmed.
Still, IPOs can happen quickly and catch you by surprise. This one could go public in one of two ways...
Will We Get a Databricks Direct Listing?
Databricks Founder Ali Ghodsi said "all options are on the table" when CNBC asked whether the company would go public via direct listing or IPO.
A direct listing typically means the company makes its existing shares public instead of offering new ones. This enables a company to go public faster as well as to avoid diluting the share price. The company also saves money by avoiding more underwriter fees and advertising expenses.
Before, the U.S. Securities and Exchange Commission did not allow companies to issue new shares of stock along with their direct listings. However, in January 2021, the SEC ruled that companies can now raise funds with new shares in a direct listing.
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That means that companies can take their shares public and raise new money and totally avoid the red tape and extra fees involved in working with an underwriter.
As great as that sounds, this is not for every company. Many startups might need the help of underwriters to help broaden their investor base and give their shares some liquidity. A traditional IPO can also help the company with more brand recognition from the underwriter's marketing help.
That said, many technology companies and startups stand to benefit the most from the new SEC ruling. And Databricks could be one of them.
Still, even if it goes public through a traditional IPO, here is how this could still be a better opportunity than Snowflake.
Should You Buy Databricks Stock?
We mentioned analysts are comparing this Databricks IPO potential with Snowflake, another software company that went public in late 2020. It was the largest software IPO in history.
The enterprise software industry is a huge, growing market with a lot of potential for innovation. The global enterprise software market is expected to be worth around $517 billion according to Statista, with overall IT spending reaching as high as $4.07 trillion.
Databricks is one innovative company that could serve multiple segments of that IT sector. And investors have more of a chance to get in on this stock than they did with Snowflake.
We know that Robinhood recently rolled out its IPO Access program for retail investors. This is an unprecedented opportunity for retail investors to buy stocks at IPO prices.
If Robinhood happens to scoop up IPO shares of Databricks and make it available on IPO Access, this will be a must-buy.
You see, Snowflake priced at $120 ahead of its IPO. Today, the stock trades for $240. We can safely say that is priced in its fundamentals, because that's relatively flat since the stock's debut around $253.
Why was the IPO price $120 and the opening price $253? Because before stocks go public, insiders have a chance to buy them. If many insiders want shares, the price skyrockets right at the IPO. Often you will see stocks crash back down once the hype dies. That did not happen with Snowflake, because it's a promising software company in a thriving industry.
Now, Databricks is also a promising software company in the same industry. The difference today is that you're more likely to get a chance at IPO shares through Robinhood.
Databricks just completed a Series G funding round, so we got an update on some of the company's progress with that. It raised around $1 billion. The money will go toward Databricks' innovation and international growth.
We know that Amazon Web Services, Salesforce, and Microsoft were among the top investors. Everyone in the tech world is excited about this company.
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About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.