The IPO market often provides juicy investment opportunities, and 2017 has been widely touted as the year of IPOs. To date, the technology sector has been in the spotlight with 9 deals in the U.S., accounting for a total of $5.2 billion. $3.9 billion was raised by Snap Inc. alone, which was the first tech IPO of 2017 and also the biggest one so far. The aggregate valuation of these nine tech companies is estimated at $37.5 billion.
Tech sector IPO activity represents a significant share when compared to the $19.3 billion raised by all IPOs on the NYSE in H1 2017. Compared to the activity in H1 2016, this is also a massive increase – only four tech companies went public in H1 2016.
From the perspective of investors, a few questions that warrant further investigation include: What is the reason behind this IPO activity? Is the pricing adequate enough for the participation of small retail investors? Are these IPOs suitable for those looking to make a quick profit?
Delving into the first question, a key factor driving the recent growth in IPO activity is related to overall index prices in the U.S. Positive movement in index performance attracts more companies to pursue an IPO, due to the expectation of a better valuation.
The S&P 500 index, standing at 2,456 on Aug 15, 2017, has risen by almost 10% YTD. It also rose 9.5% in 2016. The Nasdaq Composite index, at a level of 6,333 on Aug 15, 2017, depicts a similar trend. This strong performance in stock indices has led to 80 IPOs in the US in H1 2017, with $22 in cumulative funds raised. This represents an increase of 216% in terms of proceeds raised and 82% by deal count when compared to IPO activity H1 2016.
The historic positive relationship between the performance of stock indices and the number of companies going public in the US is illustrated in the chart below.
Eight of the nine tech IPOs in H1 2017 had an opening price range of $11 to $17 per share, which represents a suitable subscription price point for all types of investors, from small retail investors to large institutions.
Price appreciation on the first day of trading ranged from 11% to 46% for all companies, with the exception of one company which witnessed a decline of 26%. This company, however, quickly caught up and returned to the green zone. This implies a close to zero probability of loss for short-term investors looking to exit during the first few days of trading.
Both the positive performance of U.S. stock indices and the capital appreciation experienced by tech companies during the initial days of trading paint a broadly positive picture for activity in H2 2017. With respect to the tech sector, Airbnb looks ripe for an IPO in H2 2017, given its last valuation of more than $25 billion. Another potential candidate is Uber. Its swelling $68 billion valuation is likely to put pressure on the company to go public, though the chances of this materializing are low in 2017, as the company is currently dealing with various types of audit issues.