July 18, 2019
By Daniel Klausner, Capital Markets Advisory Leader, PwC
Technology IPOs, and unicorns valued at more than $1 billion pre-IPO in particular, continue to go public before being profitable. Research analysts also continue to estimate that these companies will be profitable farther down the road than in previous years. The balance of future growth versus current profitability seems to be tipping, as investors are buying IPOs that will require them to wait longer than in the past for these companies to achieve profitability.
Here’s the current state of technology IPOs and what investors need to know:
- For the broader investment community and companies contemplating IPOs, the balance between future growth prospects and current profitability and cash flow continues to be a key consideration for investment decisions.
- Investors appear to still believe in growth prospects in an uncertain future and are more tolerant of net losses and negative EBITDA at IPO as growth in revenue and market share will generally outweigh negative profitability.
- More than half of all recent US technology IPOs reported negative net income and EBITDA at IPO.
- Unicorn technology IPOs, those with pre-IPO valuations greater than $1 billion, reported negative net income and EBITDA results more often than non-unicorn tech IPOs.
- Investors in US technology IPOs appear to be more tolerant of deferred profitability, as seen by the increasing estimated time horizon to profitability.
Have investors become more tolerant of yet-to-be-profitable tech IPOs?
Two-thirds of tech IPOs are not profitable or are EBITDA negative at IPO
- In an improving tech IPO market in 2019, two-thirds reported negative net income at IPO, and almost as many IPOs were EBITDA negative.
- This is somewhat understandable as technology IPOs are usually bought for growth emanating from leveraging “platform-plays,” and the up-front investments required to build a robust product or service can be quite high.
- In particular, unicorn technology IPOs are going public with negative net income and EBITDA, suggesting investors are more willing to overlook a lack of profitability in exchange for the prospect of high growth revenues and market share.
Since 2016, the number of US-based technology unicorn IPOs has increased significantly, and investor appetite for these IPOs is likely to continue. Yet these unicorns continue to go public with negative numbers: Of the nine unicorn technology IPOs to date in 2019, eight had either negative net income or EBITDA.
- Tech unicorns(1) are going public with negative net income or EBITDA more frequently than other tech IPOs.
- More than 90% of unicorn IPOs had negative net income or EBITDA at IPO as compared to 66% of non-unicorn IPOs in the last four years.
Investors are increasingly accepting the promise of future profitability, but exactly how far off are we talking?
Estimated time to profitability and positive EBITDA is increasing
- Investors appear to be more accepting of future growth in lieu of immediate profitability in 2019 as compared to prior years.
- When looking at Wall Street research analyst estimates for all technology IPOs, the time to profitability is increasing in 2019, with 77% not being profitable for four or more years, and 53% remaining EBITDA negative for four or more years.(2)
The US IPO window is open; 2019 is off to a strong start. The key message for companies contemplating an IPO, and the broader investment community, is while net income and EBITDA continue to be key considerations for investment decisions, investors appear to still believe in growth prospects in an uncertain future.
Source: PwC US Capital Markets Watch, Dealogic and S&P Capital IQ data as of June 30, 2019.
(1) Tech unicorns are defined as companies with pre-IPO round valuations of over $1 billion.
(2) Includes only IPOs that had analyst estimates 30-days post pricing.