The excitement generated by global and local technology superstars such as Google, Facebook, Amazon, Wistech and Atlassian over the past couple of years has shifted the attention of stockbrokers, individual investors and some small cap fund managers away from mining stocks towards the new horde of tech stocks hitting the ASX.
But the tremendous success of some of these companies prompts the question: has the tech rush still got some steam heading into 2017, or is the gravy train slowly coming to a halt?
To what extent does this month's US listing of Snapchat reflect general investor nervousness about even high-profile technology companies?
Shares of the Snap, the social media giant's parent company, surged 40 per cent on the first day of trading on March 2, gaining a further 11 per cent the next day. But since then fervour has cooled and Snap shares are trading at around 15 per cent below the first day close. Much of the uncertainty around Snap relates to the lack of analysts covering the stock and a general lack of understanding of the business itself.
2016, Top 10 technology IPOs
Some of the challenges facing Snap might be company specific, but closer to home the technology fervour does seem to be cooling.
The newfound obsession with all things tech meant that last year tech initial public offerings (IPOs) outnumbered mining IPOs at a 3:1 ratio on the ASX.
The 30 tech company floats of 2016 raised a total of $830 million, and created an average 45 per cent return for investors. In contrast, just 10 mining firms were floated, raising $60 million and generating a far lower 25 per cent return.
But while the world continues on its trajectory towards digital disruption and all things tech, Australia now seems, incredibly, to be putting on the brakes all of a sudden.
The current pipeline for new listings in 2017 contains 15 mining companies and just five tech companies, effectively reversing the 3:1 tech-to-mining ratio of 2016, to a 1:3 ratio for 2017.
Earnings hiccups is one reason behind investor nerves.
The support given to stockmarket newcomers over the past couple of years seems to have occurred regardless of the companies' revenues, or a decent track record of their technologies.
US-based recruitment platform, 1-page, had a valuation of $US726 million at its peak in October 2015, but was generating only $US72,000 in revenue in the year preceding its October 2014 float. It now has a market capitalisation of just $25 million.
Employment software provider Reffind reached a market capitalisation of around $193 million at its peak, but is valued at around $3 million now. Reffind's prospectus did not forecast any revenues or expenses, and it reported around $3000 revenue in the year leading to its IPO.
Indeed most of the recent tech IPOs and reverse listings on the ASX floated with no reported revenues.
Likewise, the returns have been lacklustre if you exclude a few of the star performers. If you were to exclude the effect of 3D printing firm Aurora Labs' staggering 1380 per cent return in 2016, the average return on tech IPOs would have been 8, not 45, per cent last year.
Several other tech stocks also performed relatively well over this period, such as payments provider Afterpay and counter-drone systems tech firm Droneshield. These rose 172 per cent and 100 per cent respectively in 2016 and Afterpay has since agreed to merge with listed group Touchcorp in a transaction that could create a $500 million force in the services and payments industry.
But the positive sentiment generated by these was somewhat drowned out by a slew of poor performers, such as crowdfunding site CoAssets, artificial intelligence company OpenDNA, and independent designers' marketplace RedBubble. These companies lost 75 per cent, 35 per cent and 34 per cent of their value respectively in 2016.
Decline of reverse listings
Reverse listings (RTOs) – or mergers that companies complete to become publicly listed without resorting to an IPO – have also taken the shine off the tech sector.
In 2016 there were 69 RTOs, up from 58 in 2015, and 26 in 2011. However, 61 per cent of the RTOs in 2016 lost ground, prompting the ASX to take measures to stem the flow of such deals.
The tighter listing rules introduced last December should ostensibly hit all industries equally. But the sheer number of smaller tech firms seeking a stockmarket listing through the back door means that tech companies are likely to be hit harder than most. A number of smaller tech companies have already been prevented from hitting the ASX boards in this way in 2017.
Finding the next tech superstar
That all said, despite the naysayers' doom and gloom, hope for tech IPOs in 2017 is far from lost.
The new listing rules are helping to weed out a whole slew of tech IPOs that should never go ahead in the first place. And avoiding investing in poor performers is simply a matter of understanding what to look for, instead of jumping blindly on the tech bandwagon.
While the 2017 pipeline for large tech IPOs may look thin so far, there are still a few interesting possibilities.
One of the larger players looking to come to the local market is global cybersecurity provider, NuiX, with a likely marketing capitalisation of $500 million. Another interesting new entrant will be Retech Technology, a Hong Kong-based edtech company raising around $20 million in March.
Tech investors might also consider watching the performance of technology investment group Thorney Technologies, which listed in January, raising $42.5 million to invest in a portfolio of technology companies. Thorney floated at $0.22 and has stayed flat since listing.
10 basic criteria for assessing technology IPOs
For investors who are still willing to try their luck in tech, there are nine basic criteria that could indicate a potential superstar:
- Annual revenues in excess of $10 million.
- An international presence.
- A compelling Asian and international growth story.
- SaaS or on-demand software model.
- Business-to-business revenue stream.
- Strong growth.
- Recurring revenue from existing customer base.
- High margins relative to the industry.
- Ability to achieve financial forecasts.
- Founders or major shareholders staying with the business after the float
In 2017, tech IPOs could still offer some lucrative opportunities. It may simply be a matter of knowing what to look for.
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