Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

I never imagined I would write this sentence: Technology IPO investors have gone almost as crazy as the private financiers throwing wads of money at tech "unicorns" like Uber.

There have been so few technology companies braving the public markets this year that investors are pouncing on the tiny handful of fresh listings like hungry wolves. They are driving up stock valuations to overheated and potentially unsustainable levels for many new public companies. 

Just as private investors hunting for the next Google seem to have grown more sane about valuations, now the public markets are starting to produce some irrational tech valuations. Great. 

Tech IPO Wasteland
This year is on track to have the fewest U.S. technology IPOs since the financial crisis
Source: Bloomberg
Note: Listings for this year are through 9/22/16. The IPO figures exclude listings that raised less than $5 million.

Let's look at the tape. This summer's IPO darling Twilio is a quality company with respected software and good management. But its stock has soared since its June debut, pushing its enterprise value to nearly 19 times the average of analysts' revenue estimates for the next 12 months. Stock investors are willing to pay three times more for a dollar of Twilio's expected sales than for a future dollar of revenue by Google parent company Alphabet. That is not rational. 

Twilio and Atlassian, another software firm that went public in December, are each on the top-ten list of highest valuations among more than 450 U.S.-listed technology companies with more than $50 million in annual revenue, Bloomberg data show.  Again, these are solid companies. But should Twilio and Atlassian be more richly valued than fast-growing, well-run software firms with track records of success, such as Workday and Salesforce.com? Probably not.  

Irrational Exuberence
Recently public companies Twilio and Atlassian have some of the highest valuations in the technology industry
Source: Bloomberg

Other newly public tech firms also are tagged with fat multiples. Advertising technology firm Trade Desk is valued at nearly 8 times its trailing 12 months of revenue after an IPO this week. Meanwhile, its publicly traded peers are, at most, trading at one-and-a-half times trailing revenue. Everbridge, a messaging software firm that had a public-market debut last week, has a higher trailing revenue multiple than 90 percent of U.S.-listed technology companies, even though it's unprofitable and had only $70 million in sales over the past year.

I can understand how we arrived at this point of excess affection for newly public tech companies. It's hard to make big returns in any investment class these days, which makes risky but very promising companies such as Twilio more appealing for their potential outsize returns -- even if you have to pay 19 times forward revenue to get it.

Overheated
Newly public Trade Desk has a far higher valuation than its peers, in a sign of the plump multiples for recent tech IPOs
Source: Bloomberg
Note: Valuation for Millennial Media was calculated from its Sept. 2015 acquisition agreement. The company is no longer publicly traded.

Plus, the best and brightest technology companies are avoiding going public as long as they can. So investors denied a chance to buy shares of Uber, Airbnb or Snapchat are eager to grab consolation-prize shares of Twilio, Trade Desk and Apptio -- which priced its IPO on Thursday at a relatively conservative $16 a share, or roughly four times the company's revenue over the prior 12 months. 

It's hard to find a single villain to blame for the irrational exuberance. The bankers running these tech IPOs have been pricing new listings relative modestly. Perversely, that may be creating a demand frenzy in the days, weeks and months after the IPO. 

It bears watching what happens to Apptio's share price and valuation in the first crush of trading in coming days and weeks. Twilio also started out at a relatively sane valuation at its IPO. Only once it started trading did the over-exuberance take hold. The young companies compound the frenzy by selling only a tiny percentage of their total stock in an IPO, which magnifies any stock moves. 

It's odd to see the whiplash in the tech IPO market. For more than a year, there were very few IPOs, and many of the tech companies that did go public promptly sank like a stone. And now there are hardly any IPOs, and the ones that do list are trading at unsustainable levels. Can't we find a middle ground?

The solution may simply be more tech IPOs -- a lot more -- to satisfy investor demand. At least two more tech companies, Coupa Software and Nutanix, may go public in coming weeks. There are predictions of a surge of high-profile tech IPOs coming this year or next. That should be a healthy development to protect fragile young companies from the dangers of overpriced stock, which makes it hard to manage the expectations of investors and employees. 

It might take a tech IPO flood to quench overheated valuations, before some young companies burn to the ground.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Congratulations, Mobileye. You're number one.

  2. As Manhattan Venture Partners' Max Wolff told Bloomberg's Carol Massar recently, Twilio at its current $5 billion market cap "should come with $4 billion worth of gold."

  3. Like Atlassian, Trade Desk is profitable. That is a rare quality among young tech companies, and one that is increasingly prized by tech stock investors. 

     

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net