Investors looking for winning initial public offerings should consider straying away from the herd, and instead look at a less popular group of soon-to-be-public companies set to outperform. While investors are obsessing over the outlook for the latest string of high-profile, consumer-focused technology IPOs, a flock of nearly 50 overlooked business software IPOs 2016 has dramatically beaten the broader market over the past few years, per a detailed story by The Wall Street Journal.
This group of overlooked stocks has risen a median 126% from their debuts and includes PagerDuty Inc. (PD), Twilio Inc. (TWLO), MongoDB Inc. (MDB) and Zscaler Inc. (ZS). The latest business software company to hit the public market was Zoom Video Communications Inc. (ZM), which soared on its opening days far higher than other IPOs this year in its public debut earlier this month. Business software stocks are likely to rise even higher and have dramatically outperformed consumer tech IPOs such as Dropbox Inc. (DBX) and Snap Inc. (SNAP), which rose only 15% during the same period, according to an analysis of Dealogic data.
5 Overlooked Tech Winners
(Company, IPO date, % stock price change from initial IPO price)
- PagerDuty Inc. (PD); Date; April 11, 2019; 62.3%
- Twilio Inc. (TWLO); June 23, 2016; 749.1%
- MongoDB Inc. (MDB); October 19, 2017; 431.8%
- Zscaler Inc. (ZS); March 16, 2018; 299.8%
- Zoom Video Communications Inc. (ZM): April 18, 2019; 84%
Zoom Beats Out Pinterest
Last week, video-conferencing software provider Zoom made its debut on the stock market on the same day as popular online pinboard Pinterest Inc. (PINS). Zoom, which lists tens of thousands of corporate customers, far overshadowed the social media company, which claims approximately 265 million monthly users. Shares of the business software firm jumped 72% on their first day trading to reflect a market value of $18 billion, marking a 10-fold increase from its latest private funding round in 2017, per the Journal. Pinterest shares rose 28% to close at $24.40, about 13% higher than its last capital raise in June 2017 and reflecting a $16 billion market value.
Business-Focused IPOs Are Trouncing Consumer Ones
(Median performance of near 50 business IPOs vs 13 consumer tech IPOs)
- Corporate software companies: 126%
- Consumer-focused technology companies: 15%
Source: Dealogic, per the Journal
Consumer-Facing Companies Crushed by Tech Giants
One differentiator which favors business software companies is their ability to ward off competition in the tech world. Corporate software providers have fared well building market niches against the likes of legacy giants Microsoft Corp. (MSFT), International Business Machines Corp. (IBM), and Oracle Corp. (ORCL), while consumer techs have hard a much tougher time avoiding getting pushed out by deep-pocketed consumer tech leaders like Apple Inc. (AAPL) and Facebook Inc. (FB). This has been largely fueled by the widespread shift to cloud computing, which has created massive opportunity in the enterprise software space as old guard players shuffle to catch up to new rivals.
“It’s hard to compete with Facebook, Apple, Amazon, Netflix and Google,” said Jeff Richards, managing partner at venture firm GGV Capital. The Journal cites Snap as an example, which has seen its shares fall over 30% since their 2017 debut, dragged down by mounting competition from Facebook and its Instagram platform.
Additional concerns, including an inability of some of 2019’s hottest unicorn companies like Lyft and Uber Technologies to turn a profit, have led many market watchers to take to the sidelines on the consumer-focused tech IPOs.
Nonetheless, consumer-oriented tech companies like Pinterest continue to steal the spotlight, creating an opportunity for investors to focus on technology for business companies.
“You’re not competing with everyone else and their dog” to invest, said Santiago Subotovsky, a general partner at Emergence Capital to the Journal. Emergence was the first institutional investor to funnel capital into Zoom in 2014.