Tech companies to account for 30% of new IPOs this year

The past two years have seen the technology sector abuzz over much-anticipated public listings, such as the massive hype that surrounded the initial public offering of social media giant Facebook, as well as the excitement that accompanied more modest debuts onto the bourse, like that of micro-blogging service Twitter. Chinese e-commerce company Alibaba’s proposed initial public offering – which could see the company’s worth be anything between $200 billion and $140 billion – is set to be the biggest listing this year.

There is no doubt that technology stocks are hot, and many more companies are set to raise capital to expand by listing during the course of this year – as much as 30% of all new listings will be in the technology sector.

Technology companies that have been around for some time are also becoming increasingly valuable, as the top 20 companies by market capitalisation show.

According to PriceWaterhouseCoopers’ (PwC) June 2013 report on the top 100 global companies by market capitalisation, which took a five-year view on how different sectors have fared, Apple holds the top spot, having more than tripled its market capitalisation in the past six years.

Apple is currently worth around $530 a share, giving it a total valuation of close on $475 billion. PwC has Google in third spot, behind Exxon Mobile, although Google is now worth around $407 billion, while Exxon is only slightly ahead, at about $409 billion.

PwC notes “trailblazing technology companies like Apple, and Google are making technology one of the leading growth sectors in the global top 100”. It adds, however, that climbing the ranks is not easy, and a company would have to bolster its market capitalisation by £215 billion to move from number 20 to the top slot.

Other technology companies on PwC’s top 20 list include , , China Mobile and AT&T.

Between March 2008 and March 2013, six technology companies improved their rankings, including Apple, Google, , Oracle, Qualcomm and , according to PwC’s report. , and Intel lost ground, it notes.

Overall, the market capitalisation of these technology companies grew 35% in that time frame.

Independent analyst notes market capitalisations generally do not reflect the ranking of companies in other respects, such as in terms of whether these companies are profi table, but are rather an indicator of their reliability.

Ovum analyst concurs, noting market cap is determined by investor confidence and earning potential of the companies. “Some tech stocks perform very well, while others are consigned to the bargain basement.”

NEW CHALLENGERS

Yet, while small and large entities are attracting the attention of investors, because of their quick returns, warning bells are being sounded around whether these companies have the mettle to deliver real profits to shareholders.

Jack Ma, AlibabaJack Ma, Alibaba

Alibaba’s listing, set for a US bourse some time this year, is attracting much attention at the moment. The e-commerce firm has eschewed the Hong Kong exchange and, while this may be seen as a slight to that bourse, is heading for the financial centre of the universe. If Alibaba prices itself as a $200 billion company, as reported by Bloomberg, it would be the second largest listed Internet company after Google. However, analyst points out Alibaba’s potential raising of between $18 billion and $20 billion is a “massive” amount, making it
quite expensive.

Another recent large hit was Facebook, which listed in May 2012, at $38 a share, the top end of its expected listing price; giving it a price to equity ratio that made it seven times more expensive than Apple. Although its shares did come off sharply, they have since rebounded and are trading at around $68.

Twitter’s listing was more subdued, although successful – it listed in February and saw its stock soar 92% on its first day of trading on the New York Stock Exchange (NYSE). Industry observers commented that, as the company was worth almost $25 billion on day one, it would have to get its top creative minds together and come up with money-making means that will not put its all-important users off as it now needs to reward investors for their faith.

The company debuted with an initial offer of $26 a share, making it worth more than $14 billion. Yet, the share surged on opening, trading at $45.10 and then climbed to $50.09, before settling to end the day at $44.90.

The social media company is now worth almost $30 billion and its stock is changing hands at around $50.

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Arthur Goldstuck, " />Twitter earned almost $2 billion from its debut, and will put the cash towards capital expenditure, acquisitions and growing its base, as it targets a billion subscribers – almost four times its current user base.

Booth is wary of social media stocks.

He says these offerings may not be sustainable, as people change what flavour of social media they prefer “at the drop of a hat”. Social media companies also do not have enough of a history as this is a relatively new sector, and he would hedge his bets heavily when pondering a stake in those companies.

Imara SP Reid analyst Warwick Lucas says it is certainly true that the ratings enjoyed by social media places the stock at risk of a severe price reversal on any bad news.

MORE TO COME

Despite the caution, more listings are on their way. Hurst thinks “perhaps the next wave will revolve around mobile and social media companies in SA and the emerging markets”.

Booth says as many as 35% of new listings on the cards are set to be in the technology sector. He expects more “big buster” deals and quite a few smaller companies to debut, adding technology stocks will “probably be the big boys of the future”.

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Richard Hurst, Ovum" />IPOScoop.com says “tech IPOs have arrived” as six of the 11 companies gearing up to list on the latest new-issues calendar are technology firms. “Since the beginning of November through 14 March, the average gain for all tech IPOs was 119.8% from their initial offering prices.”

Yet, says the site, the bubble is not here yet. It points to the fact that, in the past three months, 92 companies have indicated they wish to list, of which four are technology entities. “Nope – no tech bubble there.”

Data provided by Jay Ritter, Cordell professor of finance at the University of Florida, in the US, shows the largest initial public offering in the last decade in the US was Visa, which made $17.87 billion on debut in 2008. Also included in that list is Facebook ($16 billion in 2012), Deutsche Telekom at $11.3 billion in 1996, AT&T at $10 billion, some 13 years ago, France Telecom at $6.6 billion in 1997 and Infineon research analyst Danilo Pagani says, “A human being’s attraction to getting rich quick will always fuel the hype that new tech products and services bring.”

Adds Pagani: “Misplaced judgement can cost dearly once the true value of a company is realised. It seems as though all rational thinking has gone out the window, as prices continue to rise while promises of earnings are made.”

Pagani says every stock will have to be looked at on a case by case basis. “It is clear that a large portion of tech stocks have a footprint and communication channel that is largely untapped, some consolidation across industries should be the order of the day in future.” He says should Tencent, for example, offer investment and banking services, this could be a potential gold mine.

Hurst adds some of the prices are very reasonable right now and offer good value to the investor. However, others are in the throes of reaching their peak as things such as innovation and expansion into new markets begin to die away, he notes. “These entities are, in effect, their own bubble.”

The crazy valuations of technology companies can be justifi ed if their future earnings catch up, says Pagani. “The problem is untapped potential and the rapidly changing technological environment. Once tapped, prices could rise, alternatively they should reduce once the hype subsides.”

One company that seems to have quite a store of potential is Alibaba. It describes itself as a family of Internet-based businesses that aims to “make it easy for anyone to buy or sell anywhere in the world”. It started in 1999 as a small 18-person team led by Jack Ma, a former English teacher from Hangzhou, China.

Now, it employs more than 20 000 people around the world and has over 70 offices in Greater China, Singapore, India, the UK and the US. Its site, which acts as a middle man for people wanting to buy Chinese goods, offers items from automobiles to tiaras and Naryshkine says it can only increase sales, and is set to disrupt the global e-commerce sector.

Alibaba, set to list on the NYSE, made an $800 million profit in the three months to September; a 12% gain on the previous quarter. Naryshkine says those numbers would put its IPO at a multiple of between 50 to 60, which is “quite expensive”. However, if it is growing 12% quarter-onquarter, this multiple could be justified.

, MD of , says “the numbers are no surprise, given the scale of the Chinese market, and its future potential”. “The listing price will seem cheap in a few years, much as buying into Tencent more than a decade ago now looks like the bargain of the century,” he says.

Although investors should always be cautious, at that growth level, as its multiple will drop to around 10 within the next five years, says Naryshkine. He says “look at Facebook”, which drew scepticism when it listed. “Who’s laughing now?”

Facebook, which aimed to raise $5 billion in its initial public offering, was touted as being the biggest ever Internet company to make a debut on a stock exchange since Google, just before its stock changed hands for the first time. It eventually raised a whopping $16 billion, second only to Visa’s debut in the past decade.

Google listed in 2004 at $85 a share, giving it a market capitalisation of $23 billion, according to Wikipedia, raising $1.67 billion.

Hurst adds the success behind Facebook’s listing was thanks to the earnings that it had already achieved. “In the Facebook case, I anticipate that we will see little serious change in the market cap or share price over the next 12 to 18 months, after that we could see a renewed impetus in the share and an upswing.”

Pagani says Facebook creates a market for communication in the same way a flower market as an entity creates a space to facilitate buying and selling of flowers. “There are algorithms, intellectual property and endless lines of code that control the process from start to finish and, on the scale that Facebook and Google do it at, it can be a considerable portion of the intangible asset base that pushes up the valuation.”

At the crux of it all is sales, says Pagani. “Tech companies can target users in the most efficient possible way as they know the customers’ likes and dislikes, amongt other information. Products are targeted to specific customers, allowing another layer of price discrimination and increasing target markets by blurring borders.”

Pagani adds the value of a tech stock IPO says more about its potential to exploit a large user base than it does about the particular company’s popularity. He also says people buying the stock could be unsophisticated investors and may not look at potential earnings. “They merely want to be a part of the product they find themselves and their friends using.”