The IPO Market Now Bears the Brunt of Tech Companies

Written by Henry Young. Posted in World Business

Approximately half a year ago, the number-one complaint that most technology investors had was that the private banks were lowballing the prices as soon as the company went public. There’s little doubt in the potential that most tech companies have in the United States; many of the largest companies in the world today are plying their trade in the tech industry. The conservative IPO prices became a major issue for upcoming tech players in the market, especially those that were looking to establish a solid presence within an incredibly competitive market.

However, fast forward to today and it’s unlikely that any tech company would be too worried about the conservative pricing in the IPO landscape. Only last Thursday, Okta Inc., a company that provides tailored software programs to businesses, sold more than 11 million shares during its initial public offering. The IPO resulted in a value that’s around 13.6 times more than the revenue generated by the company over the past year. The company’s shares started at around $23.56, up from the IPO that was held at $17.00. This would mean that the company’s market value would be around 18.8 times its given 12-month revenue, which is certainly not a conservative figure at all.

A Comeback of Sorts

At exactly this stage in the past year, no major tech company had held its IPO. In 2017, there have already been five, signaling a comeback of sorts for the market. Given the fact that many companies are started by talented individuals who often have to resort to guarantor loans in the early beginning to make their dreams come true, it’s easy to see why entrepreneurs are so worried about the market value of their companies right out of the gates.

Okta makes decent software programs and has a stable and highly experienced team of executives, and its sales have also seen an increase on a year by year basis. In the last fiscal year, the company’s sales increased by around 87%. However, the best comparison can be made with Twilio Inc., which went public in last June at a value of around 7.8 times its revenue for the past year. Compare it with a lesser company such as Okta Inc. and it’s easy to see the difference in the market.

If you were to evaluate the two side by side, the common subjective opinion is that Twilio makes much better software than Okta, though the growth rates and the revenue generated by both the companies are relatively similar. To further prove this point, let’s look at the IPO held by Snapchat’s parent company, Snap Inc., which also received a valuation that couldn’t possibly be justified through conventional means.

Inflation

Just a few months ago, most tech companies were generally priced at a discount. However, the IPOs of MuleSoft and Okta show a different picture and the premium pricing is likely to encourage peers. It’s pretty common in the current landscape for tech companies to have relatively high IPOs. In most cases, this turns out fine and the company generally lives up to its value. However, in other situations, the company falters and is bound to shut up shop. The IPO market is recovering slowly and that’s a very good sign for the overall economy. However, only time can be the judge for whether the market has overshot its recovery stage and is going to end up in a major fall within the near future. It’s going to be a very interesting few months, especially with the erratic government decisions over the past few months.