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Should You Get Excited Over Technology IPOs?

It’s been a wild ride this year for technology stocks.

The COVID-19 pandemic has been brutal for old economy sectors such as airlines, retail and tourism.

On the flip side, companies offering cloud-based, digital or data services have prospered as companies shifted their operations online.

Investors have been fervently pulling money out of neglected sectors and piling them into technology companies which are seen to be not only resilient but also growing despite the crisis.

As the pandemic shows no sign of abating, interest has heightened around new technology initial public offerings (IPOs) this year.

But should you be excited about these new upstarts?

Is there any justification for the hype surrounding so-called “tech” IPOs?

The technology “fever”

But first, let’s take a quick look at a bit of history.

2019 will be remembered as the year where many technology companies first went to market.

There’s video-conferencing company Zoom Video Communications (NASDAQ: ZM), cloud-application monitoring company Datadog Inc (NASDAQ: DDOG) and cloud computing services provider Fastly (NYSE: FSLY).

These IPOs have all done fairly well, chalking up gains of 85%, 34% and 29% from their IPO prices by the end of 2019.

The largest technology IPO, raising US$8.1 billion, was Uber (NYSE: UBER), though its shares ended up slumping 33% by the end of the year.

A slew of listings

If you thought last year tech company performance was impressive, wait till you hear how this year has been so far.

The surge in share prices for recent tech IPOs will make 2019’s gains seem pedestrian.

First off, there’s Snowflake (NYSE: SNOW), a cloud-based data warehousing company.

The company, backed by Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) and Salesforce.com (NYSE: CRM), priced its shares at US$120 to raise US$3.4 billion.

Upon its debut last Wednesday, its shares climbed as high as US$300 before settling at US$254 for a 112% gain.

Sumo Logic (NASDAQ: SUMO), a cloud-based machine data analytics company, raised US$326 million by selling 14.8 million shares at US$22 per share. Its shares were up 22% by the end of the first day of trading.

And JFrog (NASDAQ: FROG), a development operations company, along with Unity Software (NYSE: U), a video-game software development company, have also ended their first day of trading up 53% and 31%, respectively.

The above examples show that technology remains hotter than ever as a sector that many investors are piling into.

Valuation concerns

The problem with the above newly-listed companies is that all of them have not managed to generate even a cent of net profit.

Valuations are based on optimism that these software companies can continue to grow their user base and market share.

As the sector heats up, more competitors are also jumping into the fray as these impressive IPOs highlight the attractiveness of being in this space.

The technology industry is set to become much more crowded as more players jostle for a piece of the action.

Searching for a winner

Among these newcomers, it’s tough to determine who will be the clear winner.

With hype almost at a crescendo right now, along with catalysts brought about by the pandemic, almost all companies that are even remotely related to “tech” are displaying impressive numbers.

It’s admittedly tough to separate the wheat from the chaff.

While there may be strong companies that stand out from the competition, some of these also may not have a long track record of weathering crises.

This makes it difficult to determine if such companies can handle adversity and challenges when they eventually come along.

Get Smart: Keep calm and monitor

The upcoming IPO of Ant Group is one of the hottest yet. Billionaire Jack Ma is seeking to raise a whopping US$35 billion, making it the largest IPO ever.

The much-anticipated IPO follows strong performances by both Tencent (HKSE: 700) and Alibaba Group (HKSE: 9988), up 33% and 25% year to date.

However, based on what’s been discussed so far, it’s better to just keep calm first and monitor the business performance of these companies.

While some of the companies may indeed turn out to be star performers, it’s better to temper your expectations for now and not let the exuberance suck you in, too.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.