Will 2018 be the rebound in tech IPOs that has been promised for years?
2018 just may be the rebound in tech IPOs that has been promised for years.
According to Dealogic, 120 companies have staged IPOs in the first half of 2018, raising an aggregate of of $35 billion. It's the best first half for U.S. IPOs since 2014 and one of the busiest periods in the 24 years that Dealogic has been tracking IPO data. (That 120 figure doesn't include Spotify, which skirted the IPO processfor a direct listing.)
That's not all. Last week, as the sleepy summer season for IPOs drew to an end, Renaissance Capital published its fall IPO preview– the underwriting world's equivalent of a seasonal fashion show – that argued that the already strong IPO class of 2018 was “primed for a big finish.” Here's why:
New listing applications during July-August were up 110% over last year’s total. Based on historical trends and both public and confidential IPO filings, we believe that 70-90 US IPOs could raise over $20 billion between now and year end. Even at the low end of that estimate, 2018 would break the 200 IPO mark, which has only been surpassed twice in the last decade.
As Renaissance pointed out, the big spark to this IPO renaissance is the tech sector. Thanks in good part to successful listings of digital household names such as Spotify as well as IPOs like Dropbox, Sonos, and Xiaomi, the IPO pipeline is now primed as liquidly as it's been in recent memory. After 2014 (275 offerings raising $85 billion), the following three years were puny in terms of comparative lucre ($84 billion in proceeds raised – in total– during that three-year period.)
And every year for those previous three years, the same, enticing, top-shelf carrots were dangled before the small investor who just wanted in on the ground floor of a promising company they know and use often: Airbnb, Pinterest, Lyft, etc. Instead, those carrots dangled ever further into the future, while the less savory memories of the last decade's most notable tech IPOs (the listing fiasco that was Facebook's IPO, the ne'er-do-well IPO that was Twitter) burned in their more recent memories.
But what's happened in the past year is well worth noting. Roku, a company mistakenly written off as Tivo 2.0, emerged as the rare new platform with a potential future. It closed Monday at another record high. Stitchfix, a company with impressive financials that stumbled out the IPO gate for no good reason other than that it was founded, and led, by a woman, has also been closing at new highs, day after day, of late.
It's the age of FANG, FAAMG, or whatever the annoying, lionizing acronym of the day is for whoever's stock is doing well. There is, right or wrong, some merit to that cult of acronyms, but it's also inspired this feeling that smaller players couldn't find a place in the sun. And the lesson of the IPO market this last year is, well, the smaller players are having a nice day on the beach too.
It's not just Roku and Stitchfix. The backbone of the tech-IPO comeback is enterprise software: Zuora is up 76% from its offering price, Smartsheet is up 91%, DocuSign is up 86%, and Avalara is up 76%. Cloud-based business models that rely on subscriptions has proven to be a reliable formulafor companies going public.
And of course, some of the better-known names in tech startups from the past decade have finally taken the plunge into public markets: Spotify, Dropbox, Xiaomi and Sonos have gone public this year, and on the whole they have performed well in a market sometimes unkind to recent tech offerings.
Spotify is up 38% from the $132 a share reference price of its direct offering, while Dropbox is up 28% from its IPO offering price. Xiaomi is roughly flat with the offering price of its Hong Kong IPO, weighed down by a selloff in Chinese tech shares this summer. And Sonos is up 42% from its offering price even after falling 11% Tuesday on earnings that were merely in line with analyst expectations.
The remainder of 2018 is unlikely to see any names as recognizable as Spotify or Sonos, despite what looks to be a market welcoming of new tech offerings. SurveyMonkey filed last month for an IPO, and Eventbrite has set a range of $19 a share to $21 a share for its planned IPO. But the better-known digital brands like Lyft, Uber, Pinterest, and Airbnb are still planning on 2019 or beyond for their IPO plans.
That presents some risk, because the conditions for companies that want to go public are as good now as they've been in some time. The tech sector is leading the overall stock market in performance, thanks to rallies in giants like Amazon and Apple. The strong U.S. economy and the bull market, while both getting long in the tooth, are showing no signs of slowing down later this year. And investors are are showing a rare tolerance of money-losing startups.
Come 2019, things may be different. The trade tensions spurred by tariffs imposed by the Trump administration have been weighing on Chinese tech companies and, as Apple and others have warnedrecently, could soon hurt the growth of U.S. tech companies. Facebook, Twitter, Google, and even Amazon could face increased regulation in the increasingly politicized arena of tech giants. Tech IPO investors often take their cue from these bellwethers, and if their recent rallies stall or reverse, it could make the IPO pipeline a less friendly place to be.
Then there's the mere reality that a bull market that is nearly 10 years old can't last forever. Thanks to increased buybacks, stock-market investors have been one of the prime beneficiaries of the tax cuts enacted late last year. But it's not clear what will push stock prices higher again next year. Instead, the outlook is uncertain at best and, at worst, nowhere near as sunny as things are for tech IPOs right now.
The reasons that still-private tech companies have put off their IPO plans are well known. It's expensive, it enforces sometimes uncomfortable scrutiny, and it means participating in the quarterly parade of earnings reports and sometimes dancing to the tune of powerful investors. But to the degree that an IPO is inevitable, there is also a cost in waiting too long. Companies that need to go public at some point may be better off going public soon.