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What Does The Tech Wreck Mean for the IPO Market?

Expect to see more delays and withdrawals from the IPO market


This week for IPOs is expected to the busiest since 2007, with 14 deals on tap, according to The Wall Street Journal. But with the recent volatility, could the good times slow down or even come to an end?

Well, there are already signs of a deceleration, especially in the tech sector. And things could easily get much worse.

Of course, the tech sector has taken some painful hits lately:

Company Ticker One-Month Return
LinkedIn LNKD -22%
Pandora P -25%
Facebook FB -18%
Twitter TWTR -20%

Now it’s true that, even with these drops, many of these tech stocks still have big gains over the past year. Besides, the selling pressure may be partly the result of technical factors. After all, it is not coincidental that the selloff has happened a few weeks before the IRS deadline.

Let’s face it, there are probably many tech employees who have been hit with huge tax bills because of the gains in their stock options. To deal with this, many have had little choice but to dump their holdings.

Despite this, tech IPOs could face some longer-lasting headwinds. For instance, investors appear to be making a rotation from growth/momentum stocks to value plays. Such a move is rarely temporary. For the most part, Wall Street is getting the sense that there are juicy opportunities with cyclical and industrial stocks because of the overall improvement in the US economy.

But that doesn’t mean all tech is dead. Rather, investors are pouring money into old tech stocks as well, like Cisco (CSCO), Hewlett-Packard (HPQ), Intel (INTC) and IBM (IBM). Yet when it comes to the IPO market, the focus is on growth and new-fangled technologies.

So far, there are some indications that investors are starting to get a bit nervous. A notable example is the IPO of King Digital Media (KING), which is the maker of the widely popular Candy Crush Saga game. Since the stock went public in late March, KING is off about 18%.

There are also a variety of recent IPOs that have posted sizable declines after having strong first-day performances:

Company Ticker First-Day Return Return After Day 1
Paylocity PCTY 41% -17%
Castlight Health CSLT 149% -51% COUP 88% -32%

Oh, and here are some tech IPOs that have gone below their offering prices, which is always ominous:

Company Ticker Return
Aerohive Networks HIVE -1%
A10 Networks ATEN -8%
Borderfree BRDR -9% CRCM -20%

And the pipeline for tech IPOs is still hefty. Here are some of the main ones that are expected be launched within the next few weeks:

Company Estimated Amount to Be Raised
Box $250 million $1.5 billion
Weibo $360 million
Leju Holdings $335 million
Paycom Software $108 million
TrueCar $125 million
Cheetah Mobile $300 million
Imprivata $115 million
Total $3.1 billion

No doubt, this is large amount of stock to hit the market. Consider that all IPOs have raised a combined $12.6 billion so far this year (according to Renaissance Capital).

And the volatility in tech stocks could continue. With the earnings season starting, there could be some more negative surprises, which could drive valuations even lower.

So given these concerns — as well as the overhang of new issues poised to be sold — companies may get more realistic about their expectations. In fact, this has already happened with the upcoming deal for Weibo, which is the Chinese version of Twitter. At the top of its proposed range, the valuation comes to about $3.9 billion. But a couple months ago, Wall Street thought it would be more than $6 billion!

But again, Weibo is likely not to be alone. It’s a good bet that there are some tense discussions with investment bankers going on right now — and that tech IPOs could be facing some rough waters ahead.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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