Underwhelming Tech: Why Do Promising Technology Stocks Rarely Appreciate In Value
Long Only, Bonds, Banks, Tech
Seeking Alpha Analyst Since 2018
Oleg is an investor with 10+ years of experience. He focuses on blockchain and crypto startups as well as renewable and sustainable energy stocks. He worked in management of various banks, and has 20+ years of experience in finance and emerging tech.
He's also a Co-Founder of Pridicto, an AI-powered web analytics tool with a team based in London, UK.
His work has been featured in Investing.com, Forbes and DZone.
Summary
- 2021 has seen a range of major listings across plenty of different tech-based industries.
- There has been a notable increase in the number of years that businesses are waiting before launching an IPO.
- It’s also important to highlight that the act of launching an IPO in itself costs at least $4 million due to underwriting, legal and accounting fees.
Tech stocks have long been met with investor enthusiasm. Whether they’re an exciting new startup in an emerging market ready to IPO, or a long-term growth stock, both retail and institutional investors are smitten with tech. So why is it that company stocks from the technology sector rarely live up to their hype?
2021 has seen a range of major listings across plenty of different tech-based industries. The springtime saw the arrival of Korean eCommerce company, Coupang, as well as leading cryptocurrency exchange, Coinbase in two of the year’s largest debuts. Retail brokerage app Robinhood also joined the party in the summer with a hotly anticipated listing.
At the time of writing, none of the aforementioned stocks have gained value from their opening day. Add to the list other major debuts like Wise, Braze, GitLab, Toast, Freshworks, ForgeRock and Sprinklr which are all underperforming currently and we can see a trend of underwhelming tech emerging.
(Image: VisualCapitalist)
The underperforming listings of 2021 aren’t an anomaly, either. As the chart above shows, tech stocks are consistently among the largest IPOs in terms of proceeds but deliver generally negative post-IPO returns for investors.
(Image: The Information)
As we can see from the data above, for every success story like DLocal, there’s a Cloopen Group lurking to undermine tech performance.
So, why are so many tech stocks failing to deliver on their post-IPO potential? Let’s take a deeper look into a phenomenon that’s becoming increasingly commonplace in recent years:
The Poisoned Chalice of IPOs
When exploring the long term performance of IPOs, the Financial Times shows us that underwhelming performance was part and parcel of the investing experience.
Citing a case study conducted by Verdad, FT writer Merryn Somerset Webb found that of the past 3,700 observable IPOs since the late 1980s, the median debut lost 31% of its value from the close price on the opening day to three years after its launch.
Over a five year period, the number fell to 41% - showing that, generally speaking, it’s profoundly difficult to pick out an emerging FAANG company from a sea of offerings.
More concerning is that Verdad data found that, on average, if an investor would’ve held their wealth in IPO stocks between the late 1980s and today, they were likely to have lost around half of their wealth half of the time - and 75% of their wealth 25% of the time.
Whilst many investors identify IPOs as an excellent opportunity to buy into an investment prior to its arrival on the market, Verdad’s findings show that stock appreciation can be extremely rare across newly public stocks across many sectors.
Waiting Longer to Go Public
Although Verdad helps to show us that IPOs aren’t necessarily the shrewd investment opportunities that they often present themselves as, it still fails to show us why tech stocks, in particular, deliver such consistent levels of underperformance.
However, the answer to this may be that tech companies are simply waiting longer to make their stock market debut.
(Image: Nasdaq)
As we can see from the data above, there has been a notable increase in the number of years that businesses are waiting before launching an IPO.
This trend is especially popular among emerging tech companies, and it can be traced to a number of valid reasons. Perhaps most notably, operating a public company as opposed to a private company requires greater levels of oversight, reporting and transparency than traditional startup structures.
According to an Ernst & Young survey, it actually costs between $1 million and $2 million just to operate a public company, due to the volume of expenses associated with reporting factors and compliance - as well as greater employee compensation.
It’s also important to highlight that the act of launching an IPO in itself costs at least $4 million due to underwriting, legal and accounting fees. As a result, the decision to launch on a stock exchange can’t be taken lightly.
We’ve seen plenty of examples of major tech firms stating their intentions to remain private for longer in recent years. Revolut, a UK-based fintech firm that recently gained a company valuation of $33 billion recently stated that the company had no interest in going public at present.
“The company's founder has said that the company does not yet have a timetable for an IPO, as the initial target is to reach billions of dollars in revenues, which would allow for a successful IPO,” explained Maxim Manturov, head of investment research at Freedom Finance Europe.
Whilst Stripe, another fintech valued at $95 billion recently confirmed that the company wouldn’t be going public in 2022, despite mass speculation. “Part of where our patience stems from is the fact that it feels like we are very early in Stripe’s journey,” explained the company’s co-founder, John Collison.
Although waiting longer to launch a costly IPO is certainly a fiscally measured approach for emerging tech startups, it can be a source of frustration for investors. After all, the longer a company waits before going public, the more growth it will undergo privately - leaving less room for stocks to experience meaningful growth.
Despite this, tech stocks waiting longer to go public can be good news for investors. With more years of observable growth and the greater development of business models in place, it’s likely to be much easier to separate the wheat from the chaff and to buy into a company with better steady growth potential over time - as opposed to risking your wealth on a stock that’s just as likely to fall as it is to rise.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
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