A Look at the Chaotic 2019 Tech IPO Market

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By: R. Scott Raynovich

You've heard a lot about the "historic stock market rally" of 2019, in which major indices in the United States reached major highs. But it's not that simple. The market for technology initial public offerings (IPOs) was a bit more chaotic in 2019, with some spectacular gains as well as failures.

Overall, the IPO market was robust, particularly in the United States. U.S. IPO activity in 2019 exceeded 2018 levels, as well as 2015, 2016, and 2017 levels, using the metrics of total IPOs as well as funds raised, according to a report from MKM Partners. Tracking IPOs on NYSE and NASDAQ, 229 companies raised $62.9 billion.

Tech Rally Boosts IPOs

The IPO market was supported by a broad technology rally. The Nasdaq Composite, a technology-concentrated index, roared back from a 20% decline in 2018 to post a 35% gain for the year. IPO activity is supported by activity in the public market. Some of the best gainers of public companies in the cloud-tech space include AMD, one of the largest gainers in the index, which climbed 153%; Apple (AAPL), which gained 84%; chipmaker NVDIA (NVDA), up 77%; and ServiceNow (NOW), a provider of cloud IT services, which was up 61%. However, the Nasdaq is not cheap. It's currently trading at a price-to-sales multiple of nearly 5, the highest multiple it has traded at since the tech bubble of 2000.

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The most prominent tech IPO was Uber, which raised $8 billion in an IPO in May where it debuted at a price of $45, only to fall 33% and finish the year near $30. According to MKM Partners, technology, telecommunications, and media (TMT), as well as consumer companies, led the IPO market, with 65% of TMT and consumer IPOs raising at least $50 million, pricing at or above the high end of the original pricing range. And 27% of these IPOs had a healthy 50% or better gain on the first day of trading.

New tech IPOs included some interesting companies in the cloud and communications space, many of which performed well. These included Crowdstrike (CRWD), Datadog (DDOG), Dynatrace (DT), Ping Identity (PING), and Zoom Video Communications (ZM). Meanwhile, some of the high-profile "tech" IPOs such as Uber and Lyft bombed, leading the Wall Street Journal to call 2019 the "Year of IPO disappointment." That assessment is unrefined, but it does point to the inconsistent performance of tech IPOs -- with some giant IPOs bombing but smaller ones doing well.

VCs Cash In

One thing seems to be clear: Venture capitalists and investment banks were happy to move out big tech IPOs after 2018's volatility and some big questions about leading private "unicorns" -- or VC-backed startups with valuations at $1B+. The year was complicated by the revelation of mismanagement at WeWork, a high-profile workspace-sharing unicorn backed by many well-known Silicon Valley investors even though its pedigree as a technology company is questionable. The WeWork IPO was cancelled and the valuation slashed to a fifth of its previous valuation from a $40B+ size to $8B or so. Softbank invested nearly $12 billion in the company, and other high-profile investors included Benchmark Capital and J.P. Morgan. After the debacle, founder and CEO Adam Neumann was pushed out of the CEO role.

Despite the IPO market having huge numbers overall, the tech market IPOs were down a bit from 2018. Renaissance Capital’s annual IPO Review showed that 42 of the U.S. IPOs came from the tech sector, down from 52 last year.

"Seven of the 10 were consumer-facing companies with billions in sales and steep losses,” the report said. “Public investors were ultimately unwilling to give premium valuations to companies with unproven models in highly competitive markets, and the 10 largest averaged a return of just 2%.”

But some niche cloud technology companies did very well. Two of the standouts in the cloud and communications space included Datadog and Zoom Video. Zoom was one of the best tech IPOs of the year. It priced its IPO at $36 a share and gained 72% on the first day of trading before climbing as high as $102 in June. It closed 2019 at around $68, which gave it a gain of 85% from its IPO price.

Cybersecurity firm Crowdstrike (CRWD) raised $600 million in an IPO in June, pricing shares at $34. Crowdstrike was a bit of a roller coaster in trading, having priced its shares at $34, but popping on the first day to as high as $58 and rising as high as $99 during the year, before falling back to around $50 at year-end. Ping Identity achieved a market valuation of $1.7B in its debut in September, opening at $18.75 and raising about $190 million for the company. It ended the year at about $25, a gain of 32%.

Cloud analytics and data exchange technology has been a very interesting space to watch, yielding two interesting IPOs. Datadog (DDOG) raised over $648 million with a $7.8 billion valuation for their IPO. The company sold 24 million shares at $27 per share on September 19 and closed the year around $38, 40% higher than its IPO price. Cloud monitoring and analytics company Dynatrace went public on Aug. 1 at $16 a share and hit $27.48 a week later, ending the year at $28.

Zscaler, a network security company that was one of the best IPOs in 2018, also had a wild ride -- rising from about $40 at the beginning of the year to a 52-week high of $89, only to then fall all the way back to $45 on some dim earnings news. But the stock was still up 19% on the year.

One of the takeaways from the 2019 IPO market is that cloud and cybersecurity niches continue to be some of the most sought-after investment areas in technology. Expect cloud analytics, data, and cybersecurity companies to get a lot of attention in 2020.