Tech IPOs Are Hot Again. Now for the Real Test


The tech IPO market has been one of false starts, unfulfilled promises, and downright disappointment since its last peak in 2014.

But that has changed emphatically this year with a bumper crop of public debuts — unicorns, long-established companies, and overseas firms — that should spill into 2019, with much-anticipated initial public offerings expected from Slack, Uber, Airbnb, and other mega-unicorns.

“The IPO window is wide open,” David Ethridge, PricewaterhouseCooper’s U.S. IPO expert, tells Barron’s.

“I see everyone running to the exits. It is a highly frothy market, with valuations never higher for some of these companies,” says Andrew Anagnost, CEO of
Autodesk

(ADSK), who has a good view of the tech space from the San Francisco Bay Area headquarters of his software firm. Autodesk’s own stock is up 36% this year and 248% over the last five years.

The numbers highlight what IPO experts like Prof. Jay Ritter at the University of Florida and tech executives say is shaping up as the best year for tech IPOs, both in deals and money raised, since 2014, and before that, 2007. The recently-concluded third quarter offers a snapshot: Technology, media and telecom IPOs produced 15 offerings raising $4.3 billion, according to a PricewaterhouseCoopers report last week. The 60 total IPOs that raised $13.4 billion marked the best third-quarter performance since 2014.

Two more tech firms joined the stampede last week. On Wednesday, freelancer network
Upwork

(UPWK) more than doubled its last private valuation, to $2.2 billion. Search software company
Elastic N.V.

(ESTC), debuted Friday, giving it a valuation of about $2.5 billion. In the few days since its IPO, Elastic’s value has already soared to $4.6 billion, while Upwork has come down a bit to $2.1 billion.

Some 45 tech IPOs have now raised $15.2 billion this year, per data from Renaissance Capital. That’s the most since 49 deals raised $37.9 billion in 2014, according to another report from Dealogic. Before that, the high-water mark was 46 IPOs in 2007, according to Dealogic.

“The overall market is strong and working,” Ethridge says. “The market is definitely skewed toward tech, but it is not crowding out the market as it did in 1999” during the tech bubble.

“The question is: When does the music stop?” he says.

Maybe not any time soon. It will likely take a midterm election that casts uncertainty in Washington, D.C., or a downturn in the market to bring the IPO rush to a screeching halt, says Thomas Holden, a technology attorney in Silicon Valley.

In recent years, unicorns and established companies put off public offerings and the increased scrutiny they bring while hauling in billions of dollars from private investors. But now those private investors are looking to cash out.

The swing in momentum started last year with the successful IPOs of
Cloudera

(CLDR) and MuleSoft [since acquired by
Salesforce

(CRM) for $6.5 billion], and picked up with
Dropbox

(DBX) this year, says PitchBook venture analyst Cameron Stanfill.

“Companies on the fence between going public and seeking an acquirer see those successes, and they see the initial price ranges for IPOs” by Elastic, SVMK, the parent company of
SurveyMonkey
,
Eventbrite

(EB), and
DocuSign

(DOCU),” Stanfill tells Barron’s. “That’s very persuasive.”

The next big test could be Slack Technologies. The maker of the popular workplace instant-messaging app is reportedly primed for an IPO in early 2019 that could fetch a valuation of more than $7 billion. The listing might just kick off a banner year for unicorn IPOs that could include Uber Technologies, Airbnb, Lyft, and Pinterest.

“How Slack performs will affect the willingness to go public,” Ritter tells Barron’s.

At $7 billion, Slack would be the largest tech firm to come public since Snap (SNAP) debuted last year with a market value of $24 billion. Ritter points out the latest private valuations of Uber ($72 billion), and Airbnb ($31 billion) both eclipse Snap.

Bankers who guide companies through the IPO process are surely encouraged by the performance of recent public debuts. In the 12 months through Oct. 8, there had been 64 tech IPOs in the U.S., and they’ve averaged a return of 33%. Top performers include
Altair Engineering

(ALTR) (215% return), CarGurus (CARG) (196%), and
MongoDB

(MDB) (195%), Renaissance Capital tells Barron’s.

Tech is benefiting from digital transformation across all industries, with greater use of the cloud and software-as-a-service, says Doug Merritt, CEO of
Splunk

(SPLK), a competitor of Elastic.

“We’ve all been talking for a decade about the importance of digital transformation,” Merritt tells Barron’s. “All companies, in a sense, have tech elements. And I think we are only 1% to 2% into the transformation process.”

There are interesting comparisons between what is happening now in the tech market and what occurred more than a decade ago, according to Ritter.

By 2007, the stock market had largely recovered from the selloff after the dot-com bust several years earlier. The success of then-Google (GOOGL) and
Apple

(AAPL) led many tech companies that had deferred an IPO to return to the public markets. Additionally — then, as now — there was enthusiasm for Chinese IPOs, Ritter says.

There are two striking differences, however: The median age of U.S. tech companies going public today is 12 versus 8 back in 2007 and the companies are generating $174 million in revenue on average, roughly twice that in 2007.

One thing hasn’t changed, though. Most of the IPOs, now and then, have yet to turn a profit. Indeed, 81% of 32 tech IPOs this year, as tracked by Ritter, are unprofitable.

SVMK, the SurveyMonkey parent, priced above its initial range in September. After 19 years in operation, the company still isn’t profitable.

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