The first tech IPO of 2017 is preparing to launch as app company AppDynamics has released the latest pricing details. According to its latest SEC filing, AppDynamics will sell 13.8 million shares at a maximum price of $12, and thus could raise up to over $165 million.
AppDynamics is the first tech unicorn - a startup worth over $1 billion - of the year, and its success or failure will have an impact on whether other tech companies will choose to go public early this year or delay. AppDynamics does have some major problems which could limit its potential such as a highly competitive field and concerns about a decline in valuation. What's more, despite revenues that grew 56% in the nine months ending September 2016, it is still a loss-making enterprise. Investors may feel justified in taking a risk given its high growth and low pricing, but it is better to hold off for now as other tech companies go public.
Understanding its Potential
AppDynamics is a tech company which works in the field of application performance management (APM). It sells software to other companies, analyzes both software applications and IT infrastructure, and measures them against a benchmark to ensure that the infrastructure runs smoothly. By analyzing the software, AppDynamics states in its SEC filing that it can "enable our customers to align the objectives of their business, product development and IT operations teams."
APM is a rapidly growing field, though it is still small and reportedly only worth $3 billion. Every business out there wants to make an app which will attract loyal customers, and a growing focus on consumer satisfaction via BestAdvisor, means that older IT operations management software is struggling to catch up. Much of the growth in APM is fueled by AppDynamics, which reports a revenue of over $158 million in the nine months ending October 31, 2016 compared to $102 million in the same period for 2015.
But over that same time period, AppDynamics lost $95 million in 2016 and $92 million in 2015. While it is certainly a good thing that its losses largely leveled off, AppDynamics has to persuade investors that it will become profitable before its revenue growth levels off, which is challenging because the company states that "we expect our operating expenses to increase over the next several years."
Many tech companies are unprofitable but have high revenue growth when going public, and so this would seem not to be a serious concern at first. However, AppDynamics is actually a small company within the APM field compared to tech giants like IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT), and even other APM-focused companies like Compuware.
Furthermore, there are some questions about how much AppDynamics can grow. The terms of the IPO means that AppDynamics is worth around $1.3 billion and could be as much as $1.5 billion. But according to Business Insider, the company's last private valuation in November 2015 placed it at $1.9 billion. This is discouraging news for private investors and will depress the stock's value.
Low Price, but High Risk
There are certainly worse IPOs out there which price themselves from $10 to $12, and if an investor wants to take a chance and go for a stock with good growth potential, that is certainly understandable.
But there are legitimate questions which surround the AppDynamics IPO. How will it continue to grow and eventually become profitable, especially in the face of competition from much bigger companies? AppDynamics does not have a serious answer to this question and in fact admits that it will not be profitable over the next several years. And while it can point to its high revenue growth numbers, there are plenty of upcoming tech IPOs like Snap which will be able to boast the same thing as well.
If investors are really interested in the growing APM market, then they should look at larger companies like Microsoft which are not totally dependent on this sector. But if they are interested in other IPOs, it is better to wait until other tech companies like Snap enter the fray. This year will be a good one for tech IPOs, but there will be less secure investments like AppDynamics.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.