Not all software IPOs are created equal

This has been a record-breaking year for initial public offerings in the software space. As with most tech IPOs, most software IPOs have been off and running even before they officially hit the public market.  

A record year for software IPOs 

According to CNBC, software IPOs raised about $7.8 billion this year through mid-September, making it the biggest year for them in history. At the time that number was reported, Palantir and Asana still hadn’t held their IPOs, so the number will increase significantly before the end of the year. The previous record high for software IPOs was $5 billion, set in 2018, according to data from Renaissance Capital. 

So why is it such a big year for software IPOs? CNBC notes that the COVID-19 pandemic has caused most workers who have managed to keep their jobs to work from home, which has highlighted the importance of software even more than usual.  

Here are some of the most notable software IPOs of this year. 

Snowflake 

Perhaps fittingly, this year is not only the biggest year for software IPOs, but it’s also the year in which we have the largest one on record. Snowflake raised more than $3 billion, dwarfing the next biggest at $957 million. The company went to market with a $120 IPO price after talks initially put it in the $75 to $85 range, which was later raised to between $100 and $110.  

Some big names have invested in Snowflake so far, including Warren Buffett’s Berkshire Hathaway and hedge fund manager Dan Loeb. Salesforce also had a stake in the cloud company. However, you may have already missed the boat on this one if you believe the experts. CNBC’s Jim Cramer and multiple analysts have said that the company is now overpriced.  

On the other hand, investors pay for growth, and with Berkshire’s 15% stake and Salesforce’s nearly 10% stake, Snowflake clearly has many votes of confidence. Unfortunately for Snowflake, it looks like its shares could remain range-bound for now, but given that it’s a software stock, there’s no guarantee of that. 

JFrog 

One of the most notable things about JFrog is the fact that it is actually free cash flow positive, unlike most of the other software IPOs. Cramer recommended the company’s stock right after the IPO, but the price has since exploded. The IPO price was $44 per share, but the stock is now approaching $80. However, that hasn’t kept some analysts from setting price targets that are even higher still. 

As with most of the software IPOs this year, JFrog received a mixture of ratings from analysts. At least four firms have a buy rating or the equivalent, while at least five have a neutral rating or equivalent on the company.  

The highest price target appears to be from JPMorgan, which set a target of $90, although Needham is close behind with an $89 target. The lowest price target seems to be from Morgan Stanley, which set its target at $67. The biggest concern for the company may be the potential for competition from names like Microsoft Azure and Amazon Web Services.   

Palantir 

Investors who are looking for a lower price may want to look at Palantir Technologies, but they shouldn’t do so without considering why it is lower than the other software stocks that have launched this year. The company’s price at its direct listing was $10, but it has failed to take off like the other stocks. In fact, it’s trading below its IPO price and has been for many of the days it has been trading. 

Palantir certainly has its share of problems, but there are a few who can see a bull case for this stock. The company hasn’t turned a profit in 17 years, for one thing, and it is tightly controlled by its insiders, which makes it very unfriendly to shareholders. 

However, one Seeking Alpha contributor offered a bull case for the beleaguered stock. He argues that Palantir will be a beneficiary of the arms race for artificial intelligence and machine learning, especially as many Google employees refuse to work on government contracts.  

Asana 

Another company whose trading debut flopped was Asana, which went public in a direct listing at $27 per share. It’s now trading below that.  

Asana has posted net losses in every fiscal year since 2009, and for fiscal 2020, the company lost $118.6 million, more than twice the $50.9 million it lost in fiscal 2019, according to Investopedia. However, the company has been growing its revenue, as its fiscal 2020 revenue was up 85.8% year over year to $142.6 million.  

One problem Asana faces is its lack of paying customers. As of the end of July, it had 3.5 million free users and only 82,000 paying subscribers. If the company could increase its conversion rate, it would boost its revenue rapidly.  

These are just four of the most high-profile software IPOs this year, but there have been many others. As these four examples show, it’s never a good idea to pour money into a company just because it’s a software or tech company. Not every company in the space is going to thrive, so you’ve got to do your research to make educated guesses about which ones will.

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(Featured image by Luis Gomes via Pexels)

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