As 2019 began, the technology industry aficionados and general investment public anxiously awaited the “Year of Tech IPOs.” With 2019 in the rearview mirror, we’re looking at just how successful (or unsuccessful) the “Year of Tech IPOs” really was. The 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, and it’s been a roller coaster for shareholders.
A pattern like this…
of overvaluation was prevalent among some of the top B2C tech IPOs, which led to poor market performance following the IPO. Lyft had an IPO price of $72 per share, but post-IPO trading saw the share price plummet over 40% to $43 in January. Meanwhile, the share prices of its major competitor, Uber, declined by over 29% from $45 a share to $31 in January since its IPO.
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 2018. The share price at the time of IPO was $36 and increased by more than 100% to $73 in January.
My company has compiled financial data from different companies’ SEC filings. 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.
We found that the tech companies that had the largest revenue growth year-over-year often had better-performing stocks than their competitors. Zoom and Crowdstrike had their share prices increase 95% and 62%, respectively, post-IPO, and both had revenue growth of over 100% year-over-year prior to their IPO.
We also found that Uber and Lyft had the highest gross profit in FY 2018, but both saw declines in the post-IPO share price. Many of the tech companies that filed for IPOs generated substantial gross profit, but only two companies 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.
Based on the companies’ reported data, we didn’t find as obvious of a correlation between net income and post-IPO performance as there was with revenue growth — although 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.
We also didn’t find a clear relationship between R&D expenditures and post-IPO share price performance. Uber and Lyft lead the rankings with $1.5 billion and $300 million, 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, but 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 the 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 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. From my experience, it’s imperative that the leaders in technology companies plan the IPOs when they are profitable or at least have a realistic path to profitability in the near future.
We have seen high-profile IPOs such as Postmates get postponed, and I believe this is something we will see more in the future unless companies can convince the public market investors about their profitability plans. We have also seen examples of companies such as WeWork that have raised large funding rounds and had their IPO canceled later on. Leaders need to ensure they’re responsible when deploying capital. This is also a testament to…
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