Why you should care
Because you may have to wait even longer if you’re looking to invest in Uber or Airbnb.
It’s been a long time coming. Snap Inc., the parent company of Snapchat — the app that if you’re not addicted to, then your kids are — is finally set to hit the public markets next month. The Los Angeles–based tech outfit is hoping to raise $3 billion or more when it puts shares up for sale on the New York Stock Exchange, which would price the company at around $22 billion, the biggest U.S. tech initial public offering (IPO) since Facebook’s roughly $100 billion valuation in 2012. According to the price-per-sales metric, though, this valuation would make Snap the most expensive (some would say overpriced) tech IPO in history.
The drought since 2012 hasn’t been for a lack of talent — Uber, Lyft, Dropbox, Spotify and others have established themselves as tech titans in the intervening years — but it’s been a waiting game. After Snap, the floodgates will open, and finally we can all get a piece of these privately held pies. Or so the argument goes.
According to CB Insights, there were just 35 tech IPOs last year, down from 64 in 2014. “We expect that 2017 will see a higher number,” says Matthew Wong, a senior analyst at CB Insights. After a couple of slow years, “there’s still a strong set of companies that are waiting to go public.” But for all the anticipation and murmurings, the 2017 IPO bonanza is far from a done deal. Multiple signs are indeed pointing toward a boom — not in public offerings, but in private buyouts. Two of the first expected multibillion-dollar IPOs of 2017, software maker AppDynamics and Mauser Group, an industrial-packaging company, were snapped up by private buyers just days (or, in the case of AppDynamics, hours) before their expected entrance on the public scene. “I believe there will be more activity like that” this year, says Steve Allan, head of SVB Analytics.
Whether the multiple tech exits expected this year take the form of IPOs or private acquisitions depends on how public and private markets value these companies, says Aswath Damodaran, professor of finance at NYU Stern School of Business. “There’s a backlog because last year was not great, but that’s the only thing we know,” he says. “If the market is not receptive, then I don’t care how big your backlog is or how long you’ve been waiting, you can’t go public.” Although the months since the presidential election have seen markets rally to new heights, some analysts are beginning to urge caution, suggesting that the chances of tax reform and stimulus spending in this Congress — the major sources of investor bullishness — are overstated.
One intriguing Trump effect on the markets is that sector correlations have returned to low levels for the first time in years, meaning that it’s not the entire market that’s growing or shrinking, but rather different sectors are increasingly acting in different ways. So for the tech industry, there’s no guarantee that a rising market tide will lift its boats, especially as certain Trump policies, such as reform of the H-1B visa system for skilled immigrants, may disproportionately harm Silicon Valley. “It’s gonna be a wild ride,” says Damodaran. In 2016, political risk at home and abroad dampened spirits for IPOs, says Wong, so for companies like Snap that rely on a buoyant market for impending IPOs, 2017 is set to be a lottery too.
If somebody comes up to you with $50 million in a suitcase, do you wait to go public to try to make $100 million? With a market this volatile, you’re going to see people settle.
Aswath Damodaran, professor of finance, NYU Stern School of Business
Instead of an IPO boom, big-name acquisitions may be the story of the year. Some sort of tax holiday is likely to form part of any major Trump tax reform bill, so tech giants like Apple and Google are poised to repatriate mountains of cash that they currently stockpile abroad, and a set of blue-chip acquisitions could be a good way to put those billions to work. “We will see a significant uptick” in activity from strategic acquirers and private equity funds, predicts Allan. Multibillion-dollar acquisitions of privately held unicorns are still rare though, he notes, with Facebook’s $22 billion purchase of WhatsApp in 2014 among the few exceptions. So don’t expect Airbnb to become part of Google in some surprise megadeal this year.
Nevertheless, other big unicorns may still be willing to test the public waters. “Regardless of what the administration is doing, tech companies tend to be rather quick to adapt” to market conditions, says Allan. Big-name consumer software companies like Snap and Airbnb with proven mass appeal are more able to shoulder the risk of going public in a turbulent market than companies like Mauser Group, which, despite its financial importance, are far from being household names. With the prospect of reduced financial reporting requirements for public companies, an IPO may still be an attractive option for some.
Ultimately, the uncertain future of the stock market could work both ways. “It could end up as an incredibly bullish year and a great year for IPOs, or it could be an abysmal year,” says Damodaran. How Snap fares in a few weeks’ time will no doubt be a barometer, and with some investors reportedly reacting with skepticism to the company’s growth forecasts, a flop could indeed raise a red (or perhaps bright yellow) flag for others hoping to follow in its footsteps. In the meantime, if you want to make money from Uber or Lyft, it’s probably best to start driving rather than expect to be able to buy their stocks on public markets anytime soon.