Bubbles are Beautiful - An Analysis and Overview of the Tech IPO Market
In the past 20 years, there have been over 4000 Technology companies that have gone public internationally. Regarded as a relatively volatile and exciting class of stocks, technology companies have in many ways captured an enormous amount of the growth in our economy. Through the lens of American companies, the following is an attempt to delve into the nuances of the Technology IPO market to better understand and conceptualize how different individual companies compare relative to one another over time and the larger encompassing trends of the market.
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The interesting thing here, is that generally overtime IPO valuations are trending upwards which is arguably representative of the “unicorn” private market which has gained significant media attention recently. Where historically companies would go public much earlier in their respective life stages, more recently, technology companies are really extracting as much capital as they can from the private markets prior to IPOing leading to higher market capitalizations when they do go public.
Additionally, a lot of the spikes year to year for the average valuations can be accounted for by outliers. For example, the 2008 spike is certainly due to Visa’s IPO which was the largest IPO in United States history at the time.
The obvious take aways are reflective of the notorious “Tech Bubble” at the turn of the century. An enormous amount of companies, caught up in the hype and promise of the internet and public markets, tested the public markets which in retrospect lead to one of the largest public market disasters in recent memory. It’s interesting to note there actually still have not been any tech IPOs in 2016 (arguable 1 if you count Dell’s SecureWorks’ spinoff), possibly suggestive of a slowdown.
This graph gets into a very specific aspect of IPOs - what exchange a company trades in. The household market exchanges in the US are the New York Stock Exchange (NYSE), the S&P 500, and the NASDAQ which each encompass a specific type of company - the NASDAQ is most frequently associated with technology companies. The OTC market though is an “over the counter” exchange qualified in contrast to the aforementioned formal exchanges. Typically a company will trade on the OTC exchange when it is still too small from a valuation standpoint to meet the formal exchanges’ listing requirements. What is interesting here is the number of OTC offerings during the Tech Bubble relative to any other time. Hindsight is 20-20 but such a spike in OTC companies, which are typically not the most financially sound and which are mainly penny stocks, could have sounded the alarm to investors that something odd was occurring.
There are just some of the things that stood out to us and certainly aren't all (or even any) of the important ones - we encourage you to explore these IPOs and come away with your own.