We are assisting to the launch of many big tech IPOs, a record for the New York Stock Exchange.
All the investment gains have been swallowed up by big institutions before public trading. That has been the case for instance of IPOs such as Snowflake’s $3.9 billion IPO, but even before that Airbnb, DoorDash and Coinbase.
According to the National Venture Capital Association’s annual yearbook, investments in late-stage private U.S. tech companies, also known as growth equity, reached a record $96.6 billion last year, up more than fivefold from a decade earlier. Venture capital is also at an all-time high, having risen to $164 billion last year from $31.8 billion in 2010.
According to IPO statistics provided by University of Florida finance professor Jay Ritter, venture-backed companies who went public last year had a total market value of $477.2 billion based on their valuation at first trade. This is more than double the total from the previous year. According to Ritter’s figures, the figure never topped $100 billion from 2013 to 2018.
The trend shows no signs of slowing down.
Stripe, a payments firm, raised $600 million in March at a remarkable $95 billion valuation, which is larger than the market worth of all but 19 U.S. tech businesses. In April, Elon Musk’s SpaceX was valued at $74 billion. Cloud software vendor Databricks, which raised money in February at a $28 billion valuation, and fintech business Marqeta, which is valued in the private markets at more than $16 billion, are among the companies in the IPO pipeline. There’s also the trading app Robinhood, which is apparently receiving bids in the $40 billion area from secondary investors.
By the time public investors get their hands on the hottest companies, they’re already large-cap stocks with many years of growth built in.
‘Does the job’
According to FactSet from CNBC, only 16 of the 56 U.S. tech IPOs since the beginning of 2020 are trading above their launching price. Of the remaining 40, roughly half are still trading above their offer price, implying that the few investors who received IPO allocations in those companies profited.
IPOs, according to Christina Kramlich, a financial advisor at Chicory Wealth, are often a risky proposition. Recently, the market has been adding exorbitant costs.
“It’s always been a hit business,” Kramlich said, “but it’s especially true with enterprises staying private for extended periods of time.” “By the time they went public, their last valuation was really high.”
As of Thursday’s end, Snowflake has fallen 6% since its initial trade in September. Airbnb is down around 7% from its December IPO launching price, and DoorDash is down 25% from its IPO debut that same week. Bumble, a dating service that went public in February, has lost over half of its value since its initial public offering, and Affirm, an online lender, has lost 40% of its value since its first public offering in January.
At any of those occasions, an investment in a Nasdaq-tracking fund would have performed much better.
Direct listings have generally performed better, with analytics firm Palantir up more than 100 percent since its launch in September and collaboration software vendor Asana up 22 percent since its launch on the same day. Coinbase, on the other hand, has dropped 39% since its initial public offering last month.
Squarespace, the latest direct offering, debuted on the market on Wednesday with a $6.6 billion value, almost 34% lower than when it secured private funding in March. After a two-day roller coaster, the stock is now somewhat higher than where it started.
A number of venture-backed firms have taken advantage of the SPAC boom by going public via a reverse merger with a blank-check firm. SPACs have tended to focus on smaller targets and may have more capital-intensive business structures. Proponents of SPACs argue that they allow a broader range of investors to participate at an earlier stage, whereas in previous years these enterprises would have relied on private investors for funding.
They have, for the most part, yet to provide returns to new shareholders.
Opendoor, a real estate website, and an online health company Hims & Hers, insurance-tech services Clover and Metromile, and 3D-printing firm Desktop Metal have all seen their stock prices fall after their acquisitions were completed.
Much of the difficulty that newly-public IT businesses encounter stems from a macro market rotation out of technology as investors seek safer investments due to fears about increased interest rates and inflation. Since peaking in April, the Nasdaq has fallen more than 4%, while an index of cloud computing firms has fallen 11%. Over that time, the Dow Jones Industrial Average has gained less than 1%.
In an interview, Steve Koenig, an equities analyst covering software at SMBC Nikko Securities, stated, “We’ve seen a major retrenchment since early April.” “Things have turned around for the high-beta, high-multiple stocks.”
UiPath, a producer of software for automating monotonous office duties, was one IPO Koenig actively followed. According to FactSet, UiPath’s $1.5 billion IPO in April was the third-largest U.S. software IPO on record. After its initial public offering, the business was valued at around $35 billion, just two months after receiving private money at a similar price.
UiPath has risen 15% from its initial public offering to $75.40 as of Thursday’s closing, making it one of the stronger after-market performers among the current crop of IPOs. This week, Koenig launched coverage with a buy recommendation and a $80 price target.
“If there is a bearish case here, it is that the stock is pretty darn expensive by most metrics,” Koenig said. That is what causes people to pause.”
He believes in the essentials. UiPath’s revenue is expected to climb 36 percent this fiscal year to about $825 million, according to Koenig, and it is a leading disruptive technology in the $16 billion automation sector. According to Koenig, the company is also “best in class” at keeping consumers and encouraging them to increase their annual expenditure.
From offline to online
Looking at the broader universe of growing internet and software companies, as well as recent IPOs, Koenig believes that the rapid and ongoing change in spending from physical to digital products will continue to boost the IT industry. As a result, even if companies go public at historically high valuations, upside potential abound. Investors may simply have to endure this moment of market turbulence.
“A lot of the software businesses who have distinctive next-generation technology are going to grab that value,” Koenig added.
Craig “Tooey” Courtemanche, CEO of Procore, concurs.“That’s the bet,” Courtemanche said in an interview after his software company debuted on the New York Stock Exchange on Thursday. “I suppose the public markets consider it to be day one.”
Procore’s stock closed at $88, valuing the company at more than $11 billion.
Construction organizations employ Procore technology to bring complex procedures online and increase communication and collaboration amongst workers in different locations. Revenue increased 38 percent last year to $400.3 million, but Courtemanche claims the company has only penetrated fewer than 5 percent of its existing markets due to the construction industry’s delayed adoption of digital technology.
According to Courtemanche, “50% of the people we’re talking to are utilizing pen and paper and Microsoft Outlook to manage their construction companies.” “It is, in fact, analog.”