By the time public investors get their hands on the hottest companies, they’re already large-cap stocks with several years of growth built in.
‘Does the job’
According to FactSet, only 16 of the 56 U.S. tech IPOs since the beginning of 2020 are trading above their opening 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 generally a risky bet. Recently, the market has been adding exorbitant prices.
“It’s always been a hit business,” Kramlich said, “but it’s especially true with companies staying private for longer periods of time.” “By the time they went public, their last valuation was extremely high.”
As of Thursday’s close, Snowflake had fallen 6% since its initial trade in September. Airbnb is down about 7% from its December IPO opening price, and DoorDash is down 25% from its IPO opening that same week. Bumble, a dating app that went public in February, has lost nearly half of its value since its initial public offering, and Affirm, an online lender, has lost 40% of its value since its initial public offering in January.
At any of those times, an investment in a Nasdaq-tracking fund would have performed significantly better.
Direct listings have generally performed better, with analytics firm Palantir up more than 100 percent since its debut in September and collaboration software vendor Asana up 22 percent since its debut on the same day. Coinbase, on the other hand, has dropped 39% since its initial public offering last month.
Squarespace, the latest direct listing, debuted on the market on Wednesday with a $6.6 billion valuation, roughly 34% lower than when it raised private capital in March. After a two-day roller coaster, the stock is now slightly 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 models. Proponents of SPACs argue that they allow a broader range of investors to participate at an earlier stage, whereas in previous years these companies would have relied on private investors for funding.
They have, for the most part, yet to provide returns to new shareholders.
Website for real estate Opendoor, an online health care provider Insurance-tech services for him and her Clover and Metromile, as well as 3D-printing company Desktop Metal, have all seen their stock prices fall since their transactions were completed.
Much of the difficulty that newly-public tech companies face stems from a macro market rotation out of technology as investors seek safer investments due to concerns about higher interest rates and inflation. Since peaking in April, the Nasdaq has fallen more than 4%, while an index of cloud computing stocks has fallen 11%. Over that time, the Dow Jones Industrial Average has gained less than 1%.
In an interview, Steve Koenig, an equity analyst covering software at SMBC Nikko Securities, said, “We’ve seen a real retrenchment since early April.” “Things have turned around for the high-beta, high-multiple stocks.”
UiPath, a developer of software for automating repetitive office tasks, was one IPO Koenig closely 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 company was valued at around $35 billion, just two months after raising private capital at a similar price.
UiPath has risen 15% since its initial public offering to $75.40 as of Thursday’s close, making it one of the better after-market performers among the recent crop of IPOs. This week, Koenig initiated 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 fundamentals. UiPath’s revenue is expected to increase 36 percent this fiscal year to nearly $825 million, according to Koenig, and it is a leading disruptive technology in the $16 billion automation market. According to Koenig, the company is also “best in class” at retaining customers and encouraging them to increase their annual spending.
From offline to online
Looking at the broader universe of emerging internet and software companies, as well as recent IPOs, Koenig believes that the rapid and ongoing shift in spending from physical to digital products will continue to propel the tech industry. As a result, even if companies go public at historically high valuations, upside opportunities abound. Investors may simply have to endure this period of market turmoil.
“A lot of the software companies that have differentiated next-generation technology are going to capture that value,” Koenig said.
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 believe the public markets consider it to be day one.”
Procore’s stock closed at $88, valuing the company at more than $11 billion.
Construction companies use Procore technology to bring complex workflows online and improve communication and collaboration between workers in different locations. Revenue increased 38 percent last year to $400.3 million, but Courtemanche claims the company has only penetrated less than 5 percent of its existing markets due to the construction industry’s slow adoption of digital technology.
According to Courtemanche, “50% of the people we’re talking to are using pen and paper and Microsoft Outlook to manage their construction companies.” “It is, in fact, analog.”