Fintech, insurtech, and internet platforms; this is the season of the Tech IPO, but why are there so many, and what is causing this sudden surge?
2019 was a particularly bad year for tech IPOs. WeWork made headlines for its dramatic slew of mismanaged business practices which were uncovered following its S-1 filing with the SEC, causing the market for IPOs to take a downward turn. Instead of being a great year for going public, many companies and investors decided to wait until the whole debacle was left in the past. This followed already flailing IPOs from Uber, Lyft, and Endeavor.
That isn’t to say 2019 was a total disaster, with several newly-public companies recovering well since poor IPOs, most notably Peloton.
Fast forward to Q3 2020 though and records have been broken for both the number of companies going public and the amount of cash raised as a result of these market debuts. Among the numbers have been an inordinate volume of tech companies making the move to go public. So, why is now the best time for a tech IPO?
The IPO scene of 2020
Recent high-profile IPOs like Snowflake, Lemonade and Unity have made quite a handsome sum of money by going public. Snowflake’s final IPO price was set at $120 per share, but by the opening bell, it had already jumped to $245 per share. One month on and its share price is quite volatile, however, it has not yet dropped below $216 per share since its IPO in September.
Although there have been many critics stating that Snowflake could have made billions more through a direct listing, Snowflake itself stated that it had gained something much more valuable: investors such as Berkshire Hathaway and Salesforce. Throughout the remainder of 2020 and early 2021 investors should see many more tech IPOs; a few to note are ‘Root’, ‘Affirm’, and the long-awaited ‘Airbnb’. All three are unicorns and all three will most likely continue the trend of explosive tech IPOs, with Airbnb having the potential to become the largest tech IPO ever.
- Root is an insurance firm and it hopes to follow in the footsteps of ‘Lemonade’, another insurtech company that opened trading on its first day as a public company in June up 73% from its IPO price of $29.
- Affirm is part of the Fintech world, providing point-of-sale credit but without the need for cards. Fintech has been an under-represented industry in terms of companies deciding to go public. Affirm should make a splash, particularly as it has received a boost during COVID — revenue for the first half of 2020 was up 135% to $245.4 million.
- Airbnb is a holiday rental platform. It was unusual in the fact that it was a unicorn that was actually making a profit… at least until the pandemic hit. Now it plans to go public in December and hopes to raise a whopping $3billion with its market debut.
With each of these firms being from wildly different areas of expertise we can see why tech IPOs are so numerous this year; tech companies are now widespread across many industries and they solve a myriad of practical problems. The more our lives become digitized, the more tech companies will grow, thus attracting more attention from investors.
It’s all about timing
It seems that now is a particularly good time for tech IPOs as many are finding that they will receive a higher valuation as a public company rather than a private one. Older companies that need to move out of the private sphere and startups that were planning to go public at some point anyway are taking this chance whilst public equity is at an all-time high. Essentially, their chances of raising far more capital than they would have in previous years have never been higher.
Many investors seem to be quite taken by high growth stocks with a little risk involved. What tech companies serve up, particularly in the first few years of being a public company, tends to be a potential for high returns on original investments as these companies begin to turn a profit.
But will it last?
The short answer is ‘no’. The market will undoubtedly turn and there will be many startups, tech or otherwise, that will be left in the private domain. This era of hot tech stocks is reminiscent of the dot.com crash from the early 2000s, therefore it is always good to keep in mind that chasing the latest breakthrough IPO might be fun, but building a turbulence resistant portfolio should be a priority.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.