Wall Street Beat: Tech IPOs heat up but there's no bubble -- yet

The quality of companies going to market is different than it was during the dot-com era, analysts say

The tech IPO market is coming back, just don't call it a bubble.

A strong stock market, low interest rates and confidence in the ability of innovative tech companies to generate revenue are stoking the market for initial public offerings for tech companies.

Though the total IPO market last year declined from 2012, the fourth quarter marked a resurgence of tech offerings, and there are a slew more in the pipeline. This time, however, it's different than the heady years of the dot-com boom at the turn of the century, industry analysts say.

"I called it Insanity.com," said John Fitzgibbon, who runs the IPOScoop.com website. "You had companies run by kids just out of college, or not even, with some half-baked ideas and people clamoring to buy into them," Fitzgibbon said, of the 1998-2000 dot-com era.

Numbers assembled by market researchers and consultants point to an IPO market that is trending up.

"After a muted second half performance in prior years, rising investor confidence and a generally improving economic environment contributed to robust IPO activity in the second half of 2013," according to PricewaterhouseCoopers' Global Tech IPO Review published this week.

In the fourth quarter, prices were set on 25 tech IPOs globally, compared to eight in the year-earlier period, according to the report. In addition, the fourth quarter contributed 49 percent of total tech IPO 2013 proceeds, raising US$5.6 billion, a fourfold increase over the same period in 2012, PwC said.

It looks like the upward trend will keep right on going, according to Alan Jones, partner and Northern California IPO advisory leader at PwC, in an interview.

"We haven't seen this level of activity in 15 years," Jones said, talking about not just the 29 companies that have publicly filed for IPOs with the U.S. Securities and Exchange Commission, but also about the general level of preparatory activity and investor interest.

A number of factors are contributing to the strong tech IPO market, and the macroeconomic environment plays a big part, Jones said. In the U.S., the Federal Reserve's economic stimulus policy, including low interest rates and related low yields on bonds, makes equities attractive for investors, Jones said.

Computer stocks in particular are flying high, noted IPOScoop's Fitzgibbon. "Tech IPOs are tied to the Nasdaq -- so many tech companies are in the Nasdaq," Fitzgibbon said. "Computer stocks are up more than 30 percent on the Nasdaq from a year ago, from that point of view, the tech IPO market is long overdue."

Investors do not appear to be scared away by current valuations. Much of the reason has to do with the health and maturity of the companies themselves.

There are a host of companies focusing on software as a service, cloud, advertising, analytics and so-called Internet-of-things technology that are set to ratchet up to the $100 million dollar revenue level or are already there, Jones said. These companies have much more solid business models than many of the companies going public in the dot-com era, he said.

"It's all about the fundamentals," Jones said.

"This is very different than what we saw in 1998 and 1999; these companies are real companies with core fundamentals, solid product margins and the ability to cover costs," Jones said. "And they are a lot more mature than the companies in 1998 and 1999." In those years, the average age of companies going public was 4.5 years, now it's about 13 years, Jones said.

Meanwhile, companies offering cloud-based technology are in the spotlight, agreed Fitzgibbon. The latest tech IPO launched Friday, as Castlight Health, a provider of cloud-based software to manage healthcare costs went public, he noted. In early afternoon trading, shares were selling at $38.13, up a whopping $22.11 from its opening price.

In the U.S. since last Labor Day holiday break, the unofficial start of the autumn season, the average gain for all IPOs was 123.1 percent from their initial offering price. Additionally, 10 were up 100 percent or more, Fitzgibbon said.

According to IPOSCoop data, IPOs scheduled for next week include Amber Road, a provider of cloud-based global-trade management solutions; Paylocity Holding, which offers cloud-based payroll and human-capital management software; and Q2 Holdings, which designs secure cloud-based virtual banking solutions.

A

Also, two tech companies filed plans to go public last week: Five9, a provider of cloud software for contact centers, and Opower, which offers cloud-based software for the utility industry.

Still, the volume of IPOs by itself doesn't amount to a bubble -- at least not yet, Fitzgibbon said. After Nimble Storage went public in December, the next tech company to go public was data-security vendor Varonis Systems at the end of February. And even though more tech companies are coming to market with the IPO pipeline looking full, "two swallows do not make a spring," Fitzgibbon said.

Probably more importantly, Fitzgibbon agrees that the quality of companies going to market is different than it was during the dot-com era.

"Now you see real companies coming to market, not some fantasy football games," he said.

From CSO: 7 security mistakes people make with their mobile device
Join the discussion
Be the first to comment on this article. Our Commenting Policies