Do Investors Care about Profits at IPO? Not Really

Between 2016 and 2018, 46 Technology companies had an IPO, of which 18 IPO'd in the first half of 2018. We analyzed the companies' financials at the time of IPO (based on their S-1 filings) and how their stocks have performed.


All 46 companies, except Snap, had a positive Gross Margin at IPO. The average Gross Margin across the 46 companies was 57% while Snap’s Gross Margin was -12%.  The high cost of revenue for Snap is due to the cloud-computing power needed to host its messages, and the cost of creating original content and hardware, such as “Spectacles.” For most software companies, the Cost of Revenue is only the hosting and serving costs. Online travel platform Trivago, for instance, reported revenue of $535M and cost of revenue $3.1M, resulting in a gross margin of 99%. 


To measure profitability, we considered 3 metrics: Operating Profit measured as Earnings Before Interest & Tax (EBIT), Net Income and Operating Cash Flow:


Of the 46 companies, 14 had positive Operating Profit, 11 had positive Net Income, and 25 were generating positive Operating Cash Flow.

Below are the eleven companies that IPO’d with positive Net Profit, although 3 of them were very close to the line...


Observations:

  • With the highest Net Margin, at 43%, Greensky is a Financial Technology company that provides consumer loans for home improvement. 
  • The Cloud sector dominates the rest of the list as Pivotal Software, Dropbox, Switch, and Presidio all fall into this category
  • Both The Trade Desk and CarGurus are marketplaces, which provide a platform for buyers and sellers to meet and collects fees from both sides.


Of the 33 companies that IPO’d with a Net Loss, these are the 10 companies with the most negative Net Margin:


Next, we looked at the Operating Expenses of these businesses. Tech companies tend to spend more on Research and Development than traditional companies. The average R&D spending for these 46 companies was 22% of Revenue at their IPO, whereas the average R&D expense is 5% of Revenue across all industries in the US (Source: PwC). 


The average Sales and Marketing expense was 47% of Revenue across the 46 companies. Domo, Okta, and Trivago were spending 121%, 102%, and 94% of their revenue on Sales and Marketing, respectively. Of the companies with positive Net Income, most spent below the average on Sales & Marketing as a % of Revenue:

Note: N/A indicates the company did not disclose a separate expense line item for Sales & Marketing spend. 


The companies which generated the lowest Net Income tended to spend relatively highly on Sales & Marketing as % of Revenue. 


Stock Market Performance since IPO


Next, we looked at the top 5 and bottom 5 companies ranked by Net Margin, and their share price performance, to see if there is a link between profitability at the time of IPO and subsequent stock market performance. All prices are daily Adjusted Close, indexed to 100 on the IPO date.



Five Companies with Highest Net Margin

Three of the five companies have traded up since their IPO, while Greensky and Switch are both trading below their IPO price.



Five Companies with Lowest Net Margin



Despite having significantly negative Net Margins at IPO, Okta and MongoDB are still trading significantly above their IPO price, while Cloudera, Domo, and Snap are all trading below their IPO price.

From the two graphs above, we see the level of Net Income does not provide a strong indicator of future share price performance.


Here is the entire list of all Tech companies that have IPO'd since 2016:


Key takeaways: 

  • 78% of companies (36) were not profitable at the time of IPO, in terms of Net Income
  • The companies were spending above industry average on Sales & Marketing
  • Initial profitability does not predict long-term performance in the stock market

Sources:
News articles, company announcements, social media, and Craft analysis


About Craft:

Craft is a machine-learning powered data and analytics platform building the ‘Source of Truth’ on companies, and mapping the global economy. We organize data from thousands of sources to provide comprehensive, up-to-date sector and company profiles, ranging from early-stage to the largest companies in the world.

As the economy, and nature of work continue to undergo massive transformation, Craft’s mission is to provide context and freely available tools to help people discover and evaluate companies and opportunities. Our platform is used for market and sector research, customer lead generation, competitive analysis and career search.

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Domo
HQ
American Fork, US
Employees
1,078

Domo develops a SaaS-based platform that helps CEOs and business leaders transform the way they manage business via direct access to data. Domo updated its IPO filing on June 18th, 2018. Domo's shares will be priced between $18 and $22 at an approximate valuation of $600M. Domo was last valued at $2.3B.

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Dropbox
HQ
San Francisco, US
Employees
1,850

Dropbox is a file hosting service that offers cloud storage, file synchronization, personal cloud and client software.

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GreenSky
HQ
Atlanta, US
Employees
949

GreenSky offers consumer loan brokerage services through its online platform.

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Snap (Snapchat)
HQ
Los Angeles, US
Employees
3,069

Snap provides technology and social media services.

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The Trade Desk
HQ
Ventura, US
Employees
467

The Trade Desk is an online demand-side platform that provides buying tools for digital media buyers.

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Trivago
HQ
Düsseldorf, DE
Employees
1,609↑ 31% increase

Trivago is a company that operates an online hotel search platform.

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Cloudera
HQ
Palo Alto, US
Employees
1,470↓ 9% decrease

Cloudera is an enterprise software company, delivering the modern platform for data management and analytics.

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MongoDB
HQ
New York, US
Employees
826

MongoDB is the next-generation database that helps businesses transform their industries by harnessing the power of data.

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Okta
HQ
San Francisco, US
Employees
1,176↑ 31% increase

Okta operates an integrated system that connects persons via devices.

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Switch
HQ
Las Vegas, US
Employees
689

Switch is a technology infrastructure ecosystem corporation whose core business is the design, construction and operation of data centers.

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