2019 Tech IPO Review
As 2019 began, the technology industry aficionados and general investment public anxiously awaited the “Year of Tech IPOs”. As 2019 closes, we look at just how successful (or unsuccessful) the “Year of Tech IPOs” really was. Last year featured some of the biggest tech IPOs in recent history, including Uber, Lyft, Pinterest, and more. The hype and rapid growth of unicorns propelled their share prices up in their substantial initial public offerings. It has been a roller coaster for shareholders - Lyft had the highest IPO price at $72 per share; however, post-IPO trading has seen the share price plummet to $43 (as of January 6, 2020).
A pattern like this of overvaluation was prevalent amongst some of the top B2C tech IPOs which led to poor market performance following the IPO. Since their IPO, Uber’s share prices declined by over 29% from $45 a share to $31 (as of January 6, 2020). Their major competitor in the ride-sharing industry, Lyft, saw a decline in share price by over 40% from an IPO price of $72 to a current price of $43 (as of January 6, 2020).
However, B2B tech IPOs seemed to have stronger performance post-IPO. For example, Zoom had a market capitalization of over $9 billion at IPO, even though the gross profit it generated was less than $300 million in 2019. The share price at the time of IPO was $36 and has since increased almost 100% to over $70 (as of January 6, 2020).
We looked to see if revenue growth was a leading indicator of how companies would perform post IPO. With the influx of capital from going public, companies can deploy more resources to drive revenue growth and increase investor confidence.
In the chart below, we ranked the 2019 tech IPO companies by year-over-year revenue growth.
Companies that had the largest revenue growth year-over-year often had better performing stocks than their competitors. For example, Zoom and CrowdStrike had their share prices increase 95% and 62% respectively since IPO and they both had revenue growth of over 100% year-over-year prior to their IPO.
Next, we evaluated if profitability was an important indicator of where the companies were heading.
The two ride-sharing giants, Uber and Lyft, had the highest gross profit in FY 2018; however, they both saw declines in post-IPO share price.
Many of the tech companies that filed for IPO generated substantial gross profit, but the net income illustrated that the companies still weren’t cash flow positive. There were only two companies that were cash flow positive: Uber and Zoom with net incomes of $997 million and $7.5 million, respectively. In contrast, companies like Lyft, Slack, and Peloton had hundreds of millions of dollars in negative cash flow.
In the table below, we look at the tech IPO companies ranked by net income prior to IPO.
According to the data reported by the companies, there is not as obvious of a correlation between net income and post-IPO performance as there is with revenue growth. However, it’s important to note that Uber’s net income is achieved with many “non-operating” expenses excluded. With Uber excluded, the companies that are losing money the slowest, like Fastly and Fiverr, did have positive post-IPO share price performance.
Finally, in the table below, we look at if R&D expenditures have an impact on the post-IPO share price performance.
There is no clear relationship between R&D expenditure and post-IPO share price performance. Uber and Lyft lead the rankings with $1.5B and $300M, respectively; however, both have seen large drops in share price after the IPO. Fastly, Zoom, and Fiverr ranked the lowest in terms of R&D expenditure; however all three have seen positive growth in share price after the IPO.
There were several key findings from examining the tech IPOs. First, the private market overhyped tech company valuations, which led to overfunding of many of these tech unicorns. Although many of these companies have shown great traction in customer acquisition, their valuations are too high when taking into account factors like revenue growth, profitability, and their net income. The tumbling of their share prices following their initial IPO offerings gave these unicorns a reality check in the public market where a path to profitability is critical.
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