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As a UK investor, should I buy shares in $70bn US tech stock Snowflake?

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US tech stock Snowflake (NYSE:SNOW) debuted on the New York Stock Exchange yesterday with the most valuable software initial public offering (IPO) ever! After being pitched to sell at around $120, Snowflake shares began trading at $245.

What does Snowflake do?

A cloud software provider, Snowflake allows the analysis and sharing of immense amounts of data with on-demand capacity. It aims its services at small-to-medium-sized companies and offers scaling and pricing flexibility that outperforms competitors.

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Google, Microsoft and Amazon are its chief rivals, but it also partners with them to provide its services. Investors have noted this conflict of interest could be a flaw in its system going forward. And Snowflake itself indicated the risks in partnering with competitors in its IPO filing. Nevertheless, it’s clearly not overly worried and is committed to spending $1.2bn on Amazon Web Services during the next five years.

Prior to IPO, Snowflake was acknowledged for its impressive returns. In the first half of the year, it achieved over 130% growth and hopes to achieve $500 million in annualised revenue in 2020. Capital One accounted for 17% of its revenue in 2019, but 11% in 2020, and is expected to be less than 10% next year. Snowflake also stated in its filing that a significant decrease in revenue from Capital One could harm its business. Therefore, investing in expanding its sales and marketing team is vital to its continued growth.

Backed by Warren Buffett

Snowflake shares closed at nearly $254 on IPO day, 111% higher than expected. Back in February, the stock was valued at $12.4bn. At close of play on IPO day it was worth $70.4bn, an astounding rise in a short space of time.

Living in the UK, I tend to focus on British stocks over US ones. I’m not opposed to investing in US stocks, but it’s usually easier to buy shares in UK companies. This is partly due to market opening hours but I may also incur charges in dealing US shares and there are currency price fluctuations to consider. But with so many notable companies operating there, UK investors are becoming increasingly interested.

The key thing that intrigued me about this IPO was that Billionaire investor Warren Buffett’s Berkshire Hathaway backed it by investing $250m at the IPO price. It also agreed to buy an additional 4.04m shares in a secondary transaction.  Buffett rarely gets involved in an IPO, so this was an unexpected move. It also gave it additional clout as a stock worth watching.

Are Snowflake shares a good buy?

Globally the pandemic has seen tech stocks achieve incredible gains this year. This is glaringly obvious in the US where the rise of Robinhood (a trading app that allows individuals to buy fractional shares), has ramped up buying momentum across the sector. Retail investors are getting caught up in the IPO experience. Thrilled with the excitement of buying a new business, they don’t always carry out the necessary due diligence.

There’s undoubtedly considerable faith and confidence in Snowflake and its ability to give clients what they’re looking for. Yet the unprecedented IPO price might be hard to live up to in the long term. For this reason, I think Snowflake shares may be over-hyped just now and I won’t be buying soon. I prefer UK tech stock The Hut Group, which also IPO’d this week.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Kirsteen has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Berkshire Hathaway (B shares), and Microsoft 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), long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short September 2020 $200 calls on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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