IPO Investors Take the Baton of Tech Valuation Insanity

By Bloomberg

(Bloomberg Gadfly) — Six months ago, technology investors were complaining privately that bankers were lowballing stock prices when companies went public. Fast-forward to today; no one should be griping about overly conservative IPO prices. ​

Late Thursday, business software company Okta Inc. sold 11 million shares in its initial public offering. The IPO values Okta out of the gate at about 13.6 times its revenue over the past 12 months, based on its market value including stock options and other equity. Its shares opened at $23.56, up from the $17 IPO. That would be 18.8 times trailing 12-month revenue. This is not conservative. 

Okta has nice software, an experienced executive team, and its sales are growing quickly at a rate of 87 percent in the latest fiscal year. But we have whipsawed from last June, when a high-quality business software company, Twilio Inc., went public at 7.8 times trailing 12 month revenue to a lesser company like Okta going public at a much richer revenue multiple.

Subjectively, Twilio has better software than Okta does. Both companies had nearly identical revenue and growth rates at their IPO. Twilio was barely free-cash-flow negative compared with Okta's free-cash-flow burn of $54 million in its most recent fiscal year. 

Snapchat parent company Snap Inc. also had an unjustifiable valuation at its IPO. That may have been a unique circumstance for a unique company. But not-so-unique MuleSoft Inc. went public last month also at a multiple of 13.5 times its 2016 revenue, or a valuation of $2.5 billion including outstanding equity. This is not normal.  

Yes, it's common for tech companies to have aggressive valuations at their IPOs. Sometimes it works out fine and the companies grow into their valuation. And sometimes it does not. What surprises me isn't necessarily the heady valuations for middling companies like Okta and MuleSoft but how much has changed so quickly with IPO market conditions and pricing dynamics.

It shows investors want to buy shares of young public companies, and the demand is pushing IPO prices above what they would have been last year. If a company is considering an IPO, there are no excuses. It should do it now. Right now. 

The IPO market is recovering, and that is good. Time will tell, though, if the IPO market has overshot recovery and headed straight into a ditch.

I didn't think it was possible for Cloudera Inc., whose technology helps companies wrangle digital data, to go public anywhere close to its $4.1 billion valuation from private market stock sales. That would be 15.7 times its revenue over the last year. I had the same skepticism about Dropbox Inc., which Bloomberg News has reported is considering an IPO potentially for later this year.

Both companies have publicly traded peers trading at significantly lower valuations than they have as private companies. Cloudera and Dropbox seemed to be ripe for a big stumble on valuation — likely the worst so far among significant tech companies making the transition from private to public markets. 

But I just don't know anymore. I officially quit trying to predict capital markets. Maybe Dropbox will wind up having a higher market value than Microsoft. Maybe any company can have a successful IPO right now. Send me your pitches! 

Click right now and read this important article from my Bloomberg News colleagues about how a number of high-profile tech companies and startups — including Okta — have recently turned down acquisitions and instead put their faith on receiving higher valuations on the public markets. Okta's bet on an IPO paid off, at least so far. 

If it keeps going like this for already overvalued tech companies like Cloudera, Dropbox and Spotify, it will mean IPO investors are becoming the new piggy bank of choice for Silicon Valley startups. Over-the-top valuations aren't necessarily coming from potential acquirers like Microsoft or Cisco that don't need to worry about overpaying for companies they really want. And they aren't necessarily coming anymore in private purchases of startup stock — which had been the sweet spot for loony valuations. 

So congratulations, public market investors. Prices for young tech companies have mostly become more sane everywhere else. You are the crazy ones now.