Last week the recorded new record highs reversing all of its February losses in the process. This exuberance around tech stocks in particular and this week’s sharp falls do have rather uncomfortable echoes of events 18 years ago at the height of the last tech bubble, which saw similar over exuberance on the part of investors, before a change in sentiment saw valuations turn lower and then decline over the next five years.
As a result of the recent recovery in share prices, which this week appears to have reversed quite sharply, we’ve seen a number of tech unicorns take the opportunity to take advantage of current valuations to list their shares publicly in order to raise capital.
While it is encouraging that these companies feel confident in their ability to list their shares in this fashion, one can’t help feeling that this willingness to push forward could also be indicative of a frothy market, something that this week’s declines could well reinforce.
We saw that a year ago with Snap, a tech unicorn with a $20bn valuation which by any stretch of the imagination was absurd. It is true that the share price popped higher in the aftermath of the launch, but the euphoria proved to be rather short lived as the reality dawned that the business model was haemorrhaging cash.
This is a theme that could well be repeated tomorrow when Dropbox, the secure file sharing cloud computing solution, launches its own IPO, valuing the company at around $7.6bn.
The company had initially planned to sell 36m shares between $16 and $18 a share, but has since updated that to $18 and $20 a share. Given this week’s rout in tech stocks, and the sharp falls in the Nasdaq so far this week, management could be forgiven for sweating a little with respect to tomorrow’s launch.
Let’s hope that it doesn’t suffer from the same post IPO hangovers as previous technology stock launches that we have seen recently, the aforementioned Snap being a case in point.
There are two classes of shares, A and B, with the Class A shares to the public representing 2% of the voting rights, while the Class B shares will be retained by the founders and early investors. Snap did something similar last year when it issued shares with no voting rights at all, which rather leaves a potential investor exposed to the whims of management.
If the company were profitable there might be some justification, but it isn’t, which suggests a $7.6bn valuation should be treated with caution, particularly since Dropbox’s major competition in this space is Apple’s iCloud and Microsoft (NASDAQ:MSFT).
This also raises a concern that in terms of price point Dropbox is vulnerable to loss leader pricing from its peers, which could squeeze its margins due to their larger scale.
The success of tomorrow’s IPO is likely to be a bellwether for further activity in this sector with Spotify set to follow next month with a direct listing, and possibly Uber towards the end of this year.
DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.
No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.