After the big haul in 2014, technology IPOs appeared to take a breather this year. Investors have grown wary of the lofty valuations, especially given the underperformance of some of the most-hyped IPOs of yesteryears including Alibaba, Twitter and King (which agreed to be acquired this year).
The government’s decision to raise interest rates, currency pressures and China growth concerns led to further caution. Dealogic also saw a spike in Australian IPOs of U.S.-based companies presumably because this was yielding higher returns for founders and early investors.
Some private companies with good prospects considered the increased disclosure requirements and volatility of public markets as detrimental to their valuations. They preferred to raise cash in private funding rounds rather than go for an IPO. The most notable examples are Uber and Spotify.
All these factors notwithstanding, a few companies did test the waters this year and some of them haven’t done too bad either. Here’s a brief recap —
Box Inc BOX
Box Inc offers cloud-based solutions for access and storage of data as well as its sharing and management, facilitating content collaboration between enterprises. The company raised $175 million in its IPO.
But despite the fact that it has secured and extended its relationships with companies like IBM and Salesforce, added 55% of the Fortune 500 companies to its customer list, grown its paying customer base to around 54K and recorded registered users in excess of 40 million, the shares have slumped around 40% year to date because of its elusive profitability. The company continues to miss bottom line estimates as it attempts to diversify away from commodity-type businesses to areas where there is scope for differentiation.
GoDaddy GDDY
The domain name and other service provider for SMBs was better known for its controversial ads. But its recurring revenues and cash flows were what investors focused on as they pushed the company to price higher than initial expectations, thus raising a cool $460 million.
And that isn’t all. Through international expansion (it’s reportedly targeting China, Japan, Singapore and Korea), product development and more effective ads the company has been able to establish itself as a serious player. No wonder the shares have soared over 30% YTD making it one of the success stories of 2015.
Fitbit (FIT)
Fitbit, which raised $732 million, is another company that priced higher than initial expectations, a sure indication of strong demand. The largest seller of fitness-tracking wristbands in the value category operates in an attractive market segment. It also makes decent profits and has a viable growth plan.
Its only headache is Apple, which has too many loyalists jumping to use its Watch. Android products have been around for a while, but are also growing in number and make. Overall, the market is growing intensely competitive, which is probably why these shares are down around 7% YTD.
Etsy ETSY
Etsy, an online marketplace for hand-crafted goods raised $267 million in its IPO, but the shares tanked soon after and never really recovered. They are down over 70% year to date as the company battled with currency issues (sales are dollar denominated even when sellers are located abroad) and growing competition from Amazon’s Handmade. Management offered a disappointing guidance for the fourth quarter, which is usually the strongest for retailers so investors are not looking at the reduction in losses and gains in mobile revenue.
Shopify SHOP
Shopify offers application software for online retailers to create store fronts, payment processing and check-out. The company relies on Stripe for the actual payments processing. Since its IPO, which raised $131 million, the company has seen rapid adoption of its technology by leading technology platforms, such as Pinterest, Facebook, Amazon (as its preferred migration partner) and Twitter. But despite rising revenues and the fact that 200K online stores now use its technology, the company’s losses continue to mount. This could be why this Canadian company’s shares remain range-bound.
Match Group MTCH
IAC Interactive sold a portion of its ownership interest in Match Group, which includes 45 brands like Match.com, OKCupid, Tinder, Meetic and Twoo raising $460 million. The company has a subscription model wherein users pay to be connected to the service. It also generates some revenue from product sales. A large majority of its users connect from mobile devices, where conversion to paid members is also greater. The company is very aggressive on the M&A front.
First Data FDC
This was the biggest tech IPO of 2015, having raised $2.6 billion. In 2007, private equity firm KKR had taken it private in a leveraged buyout. The company has since trimmed operating and interest expenses and even turned in a small profit. Payments processing is a competitive and fast-growing market but First Data manages payments at over 6 million customer locations worldwide, so it has a large base. Management is reportedly planning on beefing up its Clover processing devices with additional software that further support business.
Square SQ
Recently, Square, which sells point-of-sale software (a device that can be plugged into a cell phone to enable it to process credit card payments), raised $279 million through an IPO. Square had to lower the price from initial expectations because investors weren’t willing to pay a very high price. There are a number of concerns for Square, the most important being the NFC-enabled Android and Apple phones, with which Android Pay and Apple Pay work. Samsung Pay even works on non-NFC terminals.
The electronic payments marketplace suddenly got too crowded. The other concern is with respect to its founder and CEO Jack Dorsey, who recently took up the position of a full-time CEO at Twitter, which he also co-founded. At this important juncture, when Square has just gone public with product innovation, strategy alteration and marketing initiatives becoming imperative, the company can’t do without a full time CEO. And this appears to be weighing on the shares.
Final Words
So it’s clear that that this year has been a let-down as far as IPOs are concerned. In addition to the concerns outlined above, it’s also evident that the larger technology companies are investing routinely and heavily in startups with the objective of taking them over some time later when they have developed something of value. This could also be a reason for fewer IPOs this year.
But there are signs that next year could be better. In fact, Anand Sanwal of CB Insights says that there are some companies that although not listing this year, would be pushed to go for IPOs in 2016. Sanwal attributes this to their private market valuations, which are beginning to look ridiculous when compared with similar companies trading publicly. Early investors’ only hope of raising further capital for growth is by going for an IPO. He has 531 companies in this list including Dropbox, Cloudera and Jawbone.
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