Wall Street Beat: Market turbulence seen as just a speedbump in tech IPOs
TrueCar, Zendesk jump on IPOs as baseline trends continue
By Marc Ferranti | Published: 21:14, 16 May 2014
Despite a recent selloff in technology stocks, tech IPOs just keep coming and industry watchers appear confident that the trend will continue.
Just Friday, automotive website TrueCar.com and Zendesk, which provides a customer service platform to small and medium-size businesses, went public, and the Wall Street Journal reported that Israeli car tech firm MobilEye has submitted a preliminary, confidential filing to list on the Nasdaq. Recently, Chinese Web giant Alibaba confirmed that it would launch an initial public offering in the U.S.
The list goes on, despite a slump in tech stocks, particularly on the Nasdaq. The Nasdaq computer index is flat for the year, after closing up on Friday.
"The Nasdaq has long been the barometer for tech IPOs," said John Fitzgibbon, who runs the IPOScoop.com website. So from that point of view it's somewhat surprising that the trend for a strong tech IPO continues.
In its latest Global Technology IPO Review, PwC noted that for the first quarter, there were 12 U.S. tech IPOs for a total value of US$1.6 billion, increasing year over year by 100 percent and 71 percent, respectively.
With strong capital markets, venture capitalists chose to exit in the public markets rather than execute a sale with strategic acquirers, PwC said. Barring any significant macroeconomic event, the outlook remains positive, with 24 'known' technology companies in the pipeline -- not counting companies that may have filed for IPOs privately under the U.S. JOBS (Jumpstart Our Business Startups Act) Act.
But tech company financial results for the first quarter were somewhat mixed. That, plus economic uncertainty related to the U.S. recovery, a slowdown in growth in emerging markets like China, and potential ramifications of the Ukrainian crisis, have caused some market turbulence that has especially hit tech companies.
"Tech does appear to be spinning its wheels," Fitzgibbon said.
But underlying trends appear to be stable, which may account for the continuation of the hot IPO market.
For one thing, though markets have been turbulent lately, they are up significantly year over year. The Nasdaq computer index is up 23.37 percent from a year ago, while the broad Standard and Poor's 500 index is up 12.78 percent year over year.
Companies planning IPOs also have a longer time horizon than just a quarter or so, pointed out Bryan McLaughlin, PwC Deals Partner. "The process of going public is measured in a six- to nine-month sort of timeline," McLaughlin said.
Investors remain interested in high-growth companies with disruptive technologies. Internet software and services and software companies dominated first-quarter tech IPOs, making up 62 percent of the IPOs, according to the PwC report.
Software-as-a-service companies are particularly attractive to investors because the subscription-based business model affords visibility into future earnings, McLaughlin said. "And it's these Saas sort of companies that are challenging the traditional vendors," McLaughlin said.
So mixed earnings for traditional vendors do not necessarily translate into caution in investing in companies with disruptive technologies.
What's more, the U.S. equities markets are still the most highly liquid, capitalized markets in the world, and remain attractive to foreign companies, noted both Fitzgibbon and McLaughlin.
There is also at least one major factor in considering a U.S. IPO that is not directly linked to how the markets are doing in any given period, McLaughlin noted.
"Launching an IPO in the U.S. is also about branding," McLaughlin said. "It's telling the market, 'we're here.'"
The recent slump in tech stocks is having an effect. Cloud storage company Box, for example, has delayed setting IPO terms.
Nevertheless, "The IPO pipeline remains robust," McLaughlin said.
At the close of the day Friday, Zendesk was up by $1.86 at $15.25 and TrueCar was up by $1.06 to $10.06. While those are not moonshot numbers, they are indisputably in positive territory.