Despite the frothy headlines stirred by Twitter’s initial public offering, tech is not in a bubble of the sort that arose before the 2000 dot-com crash.
There is no doubt, however, that the stock market is hot, and that has led to a spate of IPOs. After setting an IPO price of $26, Twitter shares shot up to $50.09 Thursday before closing at $44.90. Shares closed at $41.64 Friday, but the company’s market capitalization was still about $22.5 billion. Not bad for a company that has yet to make a profit.
Twitter is just the marquee name in a roster of other tech companies that have gone public lately. Just this week, security and storage company Barracuda Networks, telecom networking software provider Mavenir Systems, and web development platform maker Wix.com went public.
Technology companies are riding a wave of IPOs. There were 32 public offerings in October, more than in any other month since November 2007. With a total of 15 IPOs launched this week alone, November could bring an even greater number of offerings.
The fundamental reason for all the IPO activity is simple. “A strong stock market means a good IPO market,” said John Fitzgibbon, who runs the IPOScoop website.
Despite consternation stirred by U.S. political infighting about the deficit, the federal government closure over a budget squabble in October and the so-called “sequestration” spending cuts, the market has been flying high. The Standard & Poor’s 500 index is up 23 percent and the Dow Jones Composite index is up 21 percent for the year. Meanwhile, the New York Stock Exchange is up 22 percent and the tech-heavy Nasdaq is up a whopping 28 percent for the year.
Still, the IPO market is hardly in a bubble, Fitzgibbon said. “We’re running at about 180 IPOs per year now, compared to a 30-year average of about 360,” Fitzgibbon said, adding that in 1999, right before the dot-com crash, there were 543 IPOs.
Even a banner week like this week does not necessarily indicate a bubble. Of the four IPOs scheduled to launch a day after Twitter on Friday (all non-tech), one cut its IPO price, one launched within range, another was rescheduled until next week, and another has been postponed with no fixed date. “That does not look like a bubble to me,” Fitzgibbon said.
Tech sector doesn’t lead IPO parade
Within the general IPO market, tech is doing well but other sectors have launched more offerings this year. Out of all the IPOs that generated more than $100 million, the tech sector is in fourth place in terms of number of deals, behind the financial, health care and consumer sectors, according to data from Renaissance Capital.
What’s more, tech-vendor business models involve less “pie-in-the-sky” thinking, IPOScoop’s Fitzgibbon noted. Among other things, the cloud-based technology being sold by companies involved in IPOs is inherently different than the old client-server technology of the dot-com era, for both sellers and buyers.
“It’s ‘real cloud’ this time,” Canaccord Genuity analyst Richard Davis said in a research note issued Thursday. “In 2000, version 1.0 was called ‘web enabled,’ which basically meant a web-like user interface, but not much more.”
Cloud software offers advantages to both the developers and users. “From the software company’s standpoint, cloud software is easier to develop and administer for the simple reason that you have fewer extant versions in use,” Davis said. This cuts R&D costs by half, he said.
“Software companies used to mail out thousands of CDs to different companies, so you had users on all these different versions of the software,” said Peter Gassner, founder and CEO of life sciences cloud software company Veeva, which launched its IPO last month.
“With cloud software, everyone can be on the same version,” a phenomenon that among other things reduces turnaround time for innovation, Gassner noted.
“Innovation time between when a customer had an idea and when developers could do something with it could be four years — now it’s four months,” Gassner said.
The usage feedback Veeva gets is not only from life sciences companies that use its software, but also from end-user physicians and clinical trial managers, for example, who are constantly logging data.
This data can be captured and then used by Veeva’s life sciences customers to add value to their own services. “This is transformational,” Glassner said. “Companies are always trying to move up the value chain.”
At this point in the development of cloud technology, enterprises appear to have accepted this vision, noted Canaccord’s Davis. “Cloud is an accepted, and frankly desired, architecture for corporate IT buyers,” Davis said.
Meanwhile, if the market takes a turn for the worse, the number of IPOs will undoubtedly decline. That probably wouldn’t keep companies with solid business models out of the market for long, though.
Veeva’s decision to go public was not based on the vagaries of the stock market, Gassner said. Enterprises want to consider their primary software suppliers as partners and, as such, want them to undergo the sort of scrutiny that comes with being a public company, he said.
“We decided to go public a year ago,” Gassner said, “You can’t time the market — it may be up, but it will go down.”