One thing’s for sure: This ain’t the late ’90s.
Back then, shareholders showered money on any company with a name that ended with dot-com, seemingly without regard to exotic things like profits or workable business models. Stock prices soared after initial public offerings, then inexplicably kept going up. It didn’t last. The result was a crash that pushed the economy into a recession.
Today, shareholders don’t seem to be taking the bait. Of the nearly dozen tech companies that went public this year, none have enjoyed breakaway success. And two of the most highly anticipated stocks — Snap and Blue Apron — have been outright busts, trading well below their IPO prices.
With these new tech stocks, “investors have been discerning about valuations,” said Matthew Kennedy, an analyst with Renaissance Capital, a research and investment firm in Greenwich, Conn., that tracks IPOs.
Normally, you could blame such underperformance on a weak stock market or perhaps a glut of tech IPOs depressing investor demand.
But those factors don’t apply now. There has been a dearth of recent tech offerings, and the stock market continues to boom. Over the past year, the S&P 500 is up 14 percent; the tech-heavy Nasdaq index has jumped 25 percent.
There can be only one explanation: Wall Street is simply calling the bluff of startup backers.
Over the past five years, private tech firms have attracted billions of dollars not only from the traditional venture capitalists who backed companies like Apple and Google, but also from mutual and pension funds and endowments. These institutional investors have been looking to generate higher returns because the Federal Reserve has kept interest rates at 1 percent or lower. Lower interest rates make traditional assets like bonds and money market accounts less profitable for investors.
All of this new money flooding these companies created a new class of assets called unicorns, private tech firms worth at least $1 billion on paper. Uber in San Francisco is the largest of these unicorns; investors have valued the ride-hailing firm at $70 billion, more than the market values of Southwest Airlines, Sony or Ford Motor Co.
But these lofty numbers have always been suspect. They represent what investors pay for a tiny slice of a company, with lots of protections should things go south. Some analysts believe these companies have avoided going public because they fear Wall Street will slash their valuations.
“A lot of these (private) valuations are questionable,” said Craig Everett, an assistant professor of finance at Pepperdine University’s Graziadio School of Business and Management. “You wonder if all of these unicorns are truly unicorns.”
In March, Snap Inc. in Los Angeles, maker of the popular Snapchat mobile camera app, priced its IPO at $17 per share, giving itself a valuation of $34.7 billion. But since they began trading, Snap shares have declined 10 percent to Friday’s close of $15.27, a market value of $18 billion.
Blue Apron, an online meal delivery service based in New York, initially set its IPO price at $15 to $17 per share, a valuation of close to $3 billion. But after weak investor demand, the unicorn went public last month at $10 per share. The stock now trades at less than $8.
Blue Apron Holdings Inc. signage is displayed during the company’s initial public offering (IPO) on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Thursday, June 29, 2017.
Snap and Blue Apron seem like the type of tech stocks that would have thrived had they existed 20 years ago: fast-growing firms making big bets on the Internet. Back then, people really didn’t understand Internet stocks, only that they were the rage.
These days, investors seem more disposed to business software companies, less sexy firms but ones that generate reliable revenue and are closer to making a profit.
Take MuleSoft in San Francisco, valued by its private investors at $1.5 billion. The company went public in March at $17 per share and now trades at around $25. A solid success.
But Wall Street is hardly going crazy over the stock. MuleSoft shares are down 12 percent from their 52-week high in May.
Cloudera Inc., a data analytics firm in San Francisco, is also underwhelming Wall Street. Today, Cloudera is trading at $17 per share, $2 higher than its IPO price, but down 26 percent from its 52-week high in June.
Tintri, a Mountain View storage-hardware company, went public in June after delaying its offering by a day and slashing the price per share to $7. Its stock closed Friday at $6.99.
We’re likely to see similar stories this year.
Tech companies “may not have another choice but to go public,” said Kennedy of Renaissance Capital, noting that many of these firms have less than a year’s worth of cash on hand.
“They are getting to the point where they need to come to the IPO market.”
What about finding a buyer? That option is looking iffy too.
SoundCloud, for example, reportedly held buyout talks with Spotify and Google last year. Now the online music-sharing site says it has enough cash to fund its operations for only the next few months, even after big layoffs.
Like IPOs, mergers and acquisitions have historically benefited from a bull market.
Yet from 2015 to 2016, tech firm valuations have compressed from 10 times their operating profit to 8½ times, according to a major survey of investment bankers conducted this year by Everett, the finance professor at Pepperdine. The survey covered companies with annual operating profits between $25 million to $50 million.
This marks the first time the multiple has declined since 2010, “suggesting the perception of lower growth opportunities by investors,” the report said.
“Valuations have been extremely high even for relatively small companies,” Everett said. “The time is coming for the other shoe to drop.”
Rohit Kulkarni, director of research for SharesPost in San Francisco, said investors over the past 12 to 18 months have clearly been favoring public companies over private tech firms. SharesPost is an online service for investors to trade stock in private companies.
But Kulkarni thinks private companies will still pay off for investors over the long term, either through an IPO or outright sale.
Right now, Wall Street begs to differ.