It used to be that December was no man’s land on Wall Street, with most institutional investors looking to clean up their books ahead of year’s end, and bankers and IPO prospects duly avoiding the post-Thanksgiving period for new listings. That has been anything but the case this year, with three high-profile offerings going out in this, the last full week prior to Christmas.
Yesterday, we saw LendingClub raise $ 870 million, selling shares at $ 15 – above its already increased range of $ 10 to $ 12 – and ending the day with its stock up 56 percent, at $ 24.70. The company’s market cap is now $ 8.9 billion, up massively from its last private round, which carried a $ 3.5 billion valuation. So far so good for December listings.
Today, both New Relic and Hortonworks followed suit, continuing the trend of testing Wall Street optimism at the end of a year in which the S&P 500 has gained nearly 10 percent and the Nasdaq has reached all-time highs. Each company managed to sell shares at prices above initial expectations and has seen substantial pops in first-day trading.
The two tales of New Relic and Hortonworks, both cloud-based, big-data services, seem similar on the surface, but expectations couldn’t have been more different in the weeks leading up to today’s listings.
After raising its final private round in March of this year at a reported $ 1 billion valuation, Hortonworks priced its shares in its IPO at just $ 538 million at the low end of its range. Even at this reduced price, the company’s S-1 filing was met with questions, most notably, “Where are the margins?” Over the first nine months of 2014, the company saw revenues grow by 88 percent – albeit off a modest base of just $ 11.4 million. But its operating loss nearly doubled over the same period reaching more than four-times its revenue at $ 81 million, up from $ 49 million in the year-ago period. The problem? A difficult to scale, services-oriented business model.
As the company writes in its filing, “We generally make the Hortonworks Data Platform available free of charge and derive the predominant amount of our revenue from customer fees from support subscription offerings and professional services.” Wall Street has expressed concern that Hortonworks will ever be able to squeeze a profit out of this business model. Still-private competitor Cloudera, on the other hand, charges for proprietary software, in addition to generating services revenue.
The Hortonworks offering was also labeled a bellwether moment for the Hadoop and broader big-data markets. On that note, Cloudera, which just raised $ 160 million in fresh private-market funding, is surely an interested observer. Like Box’s ill-received S-1 before it, Hortonworks heavy spending seemed to run afoul of Wall Street’s sensibilities, further making this a test for the high burn rate-style of company building that is en vogue in Silicon Valley today.
But with expectations duly lowered, Hortonworks has impressed in its NASDAQ market debut. The company raised $ 100 million at $ 16 per share – up from its $ 12 to $ 14 per share estimate – and has seen its stock rise more than 64 percent today to trade above $ 26 . The result: a market cap of better than $ 995 million, all-but making up the discount granted to IPO investors from its previous private-market valuation.
New Relic on the other hand, was well received leading up to its IPO, with multiple price increases – from an initial range of $ 18 to $ 20 per share, to $ 20 to $ 22, and ultimately selling shares at $ 23 on the NY(f)SE – indicating strong demand. This optimism can be traced back to two things: growth and market opportunity.
New Relic has seen revenues double each of the last two years, growing to $ 63.2 million for the year ending in March this year – better than three-fold that of Hortonworks – up 113 percent from its $ 29.7 million intake for the year-ago period. New Relic saw revenue grow by 83 percent in the last 6 months. Like Hortonworks, however, losses have grown as well – although not as quickly – nearly doubling over the same period from $ 22.5 million to $ 40.2 million. But where Hortonworks’ is losing more per dollar of revenue, New Relics operating loss shrank to 41 percent from 70 percent a year earlier.
As with Hortonworks, however, Wall Street has shown an appetite for this high burn, high growth story. New Relic’s shares opened trading at $ 30.16 and is now at $ 34.64, up a total of 50 percent over its offering price. Like Hortonworks, New Relic is also in a competitive category, with still-private competitor AppDynamics is preparing its own IPO.
Going into today’s offerings, the prevailing wisdom was that New Relic is a large and growing business that, while losing money today, had profitability reasonably within its sights. To the contrary, there appeared to be far more concern with Hortonworks’ mounting loss rate. But, as different as expectations were for the two companies their IPOs, with the markets closed for the day, the verdicts are surprisingly similar. Whether that’s more a reflection of Wall Street’s broader euphoria for new tech issuances (this week) and momentum of the big data sector – both Yodlee and HubSpot remain up from their October IPO prices – will be something we can judge in the coming weeks and months as these stocks settle into regular trading. The biggest winner today week may be Benchmark’s Peter Fenton, who led the firm’s investment in both companies.
Also, it’s worth remembering that a big post-IPO bump in share price isn’t always good news. Not only can that mean a company has left too much value on the table, but it can also invite short-term-minded public investors to quickly book gains and send prices falling as quickly as they rose. Nevertheless, this is shaping up to be a December to remember for Silicon Valley. According to market intelligence firm Ipreo, there have been 10 IPOs thus far in December, raising a combined $ 2.2 billion – almost all of which came this week – with an additional four offerings expected before the year’s end. We’ll see how long Wall Street hangs on to its holiday cheer.
[Image via Wikicommons]