Buy or pass? The pros and cons of investing in 9 upcoming tech IPOs from Palantir to Asana
No tech company from California’s famed startup basin, Silicon Valley, has gone public since last year. That could be because some high-profile 2019 Silicon Valley IPOs like Uber and Lyft flopped. But investors have short memories, and this week a half-dozen startups from the Valley filed to go public. About another half-dozen tech startups from other regions also announced their IPO plans this week.
Here are some key statistics and pros and cons investors may want to weigh vis-à-vis Palantir, Asana, Snowflake, and the rest of the upcoming class of late 2020 tech IPOs. Each company’s description includes a link to its S-1 filing. All financial data is from 2019 unless otherwise indicated.
2019 revenue: $743 million
Revenue growth: 25%
Gross margin: 67%
Net loss: $580 million
Founded in 2003, Palantir created software to help defense and intelligence analysts sort through massive amounts of information to catch terrorists. It has since branched out to offer big-data analysis software to commercial and nondefense customers as well. Cofounder and CEO Alex Karp is moving the company’s headquarters to Denver and took shots at the culture of Silicon Valley in a letter accompanying the IPO filing. “We seem to share fewer and fewer of the technology sector’s values and commitments,” he wrote. The company is going public via a direct listing.
Pros: Palantir has become synonymous with uncovering fraud and wrongdoing, a need that is unlikely to diminish, given human nature. As the world becomes increasingly digital, there is ever more data for Palantir to analyze. It is on pace to hit $1 billion of annual revenue soon.
Cons: Palantir has been in business for almost two decades and isn’t profitable yet, with substantial expenses for research and development accounting for almost half of its revenue, though that dropped to less than one-third in the first half of 2020. It has also run into controversy about some of its clients such as ICE. Palantir is already valued at $20 billion by its VC backers.
2019 revenue: $143 million
Revenue growth: 86%
Gross margin: 86%
Net loss: $119 million
Asana was founded in 2008 by former Facebook cofounder Dustin Moskovitz. Its subscription software helps workers communicate and coordinate projects, avoiding long chains of email. The company is going public via a direct listing.
Pros: The company already has 1.2 million paid users. Customers typically increase their use of the platform once they sign on. Asana’s dollar-based net retention rate, which measures how much customers spent in a quarter versus how much the same customers spent a year earlier, is over 120% for 2020.
2019 revenue: $1.1 billion
Revenue growth: 17%
Gross margin: 20%
Net loss: $8 million
Corsair sells personal computers and related peripherals for video gamers and other high-performance users. Founded in 1994, the company was bought for $525 million in 2017 by an investor group led by EagleTree Capital. The company is going public in a traditional underwritten IPO.
Pros: Spending on video games is booming during the pandemic, and Corsair is one of the top suppliers of high-end PCs desired by gamers. The company has been profitable in the first half of 2020 and will be using proceeds from the IPO to pay down debt, further bolstering its bottom line.
Cons: Selling PCs is a highly competitive business and subject to rapid technological change.
2019 revenue: $265 million (fiscal year ended Jan. 31, 2020)
Revenue growth: 174%
Gross margin: 56%
Net loss: $349 million
Founded in 2012 by former Oracle developers, Snowflake is seeking nothing less than to reinvent the database for the cloud-computing era. New CEO Frank Slootman has been rapidly bulking up its sales force. It is going public in a traditional underwritten IPO.
Pros: Snowflake has been one the fastest-growing apps in the world of business as it helps customers harness vast amounts of data in a speedier and cheaper way than older solutions. Its net revenue retention rate was 169% last year.
Cons: Slootman’s sales push has led to massive sales and marketing expenses that exceeded revenue last year (though not in the first half of 2020). Many other companies see the same opportunity, including the three major cloud providers, Amazon, Google, and Microsoft, plus Oracle itself. Snowflake’s software runs on the servers of the major cloud providers, so in a sense Snowflake is dependent on its top rivals.
2019 revenue: $155 million (fiscal year ended Jan. 31, 2020)
Revenue growth: 50%
Gross margin: 71%
Net loss: $92 million
The 10-year-old cloud service seeks to help businesses monitor key metrics and real-time information for everything from customer sales to cybersecurity intrusions. It says it monitors 19 billion events per second for its customers. Sumo Logic is going public through a traditional IPO.
Pros: The growing trends of smart machines, or the Internet of things, and the use of artificial intelligence and machine-learning apps mean Sumo Logic should remain in high demand from a growing customer base.
Cons: There is plenty of competition to harness IoT and A.I. for businesses from rivals ranging from Splunk, Elastic, and Datadog to Amazon and Microsoft.
2019 revenue: $542 million
Revenue growth: 42%
Gross margin: 78%
Net loss: $163 million
Unity, founded in 2004, provides the software underpinnings for many popular real-time and mobile video games, including Township, Monument Valley, and Oddworld. The company says 53% of the top 1,000 games on Apple and Google’s mobile app stores use its software. The company is planning a traditional IPO.
Pros: Mobile gaming remains a fast-growing market, and Unity is expanding into other fields like virtual reality experiences. Epic Games, a competitor, has recently put its reputation at risk by suing Apple.
Cons: In business for 16 years, Unity is still losing money. As rival Epic has discovered, Apple and Google can set onerous terms for game developers on their dominant mobile platforms.
2019 revenue: $737 million
Revenue growth: 6%
Gross margin: 80%
Net income: $103 million
Bentley Systems is a leading software developer for the design, construction, and operation of big infrastructure projects like stadiums, dams, and airports. It was founded by the Bentley brothers—Barry, Keith, Ray, and Greg—in 1984. German conglomerate Siemens also owns a stake in the company. Bentley is doing a traditional IPO.
Pros: The company is a market leader for big construction project software and has allied with Siemens and Microsoft. For the past year, Bentley’s recurring revenue net retention rate was 110%. The company is profitable and has been for years.
Cons: Infrastructure construction is dependent on strong economic times. The company’s revenue has not grown much in the past few years. All of the shares being sold are from existing shareholders, so the company won’t get money to expand.
2019 revenue: $149 million
Revenue growth: 31%
Gross margin: 54%
Net loss: $88 million
Also known as American Well, the 14-year-old startup is a leader in the field of telehealth, helping connect doctors and nurses to patients via its software platform. The COVID-19 pandemic has created a boom time for Amwell: Of the 5.6 million telehealth visits it has hosted since going into business, 2.9 million, or 52%, were in the first half of this year. Google is an investor in the company, which is doing a traditional IPO.
Pros: As noted, the pandemic is prompting a massive shift to virtual health care visits that is expected to continue even after COVID-19 fades. The company has relationships with 150 top health systems, including over 2,000 hospitals.
Cons: The company has large losses relative to its revenue despite its long track record. Health care is also a highly regulated business, and restrictions on the use of telehealth, some of which were relaxed during the pandemic, could be tightened.
2019 revenue: $105 million
Revenue growth: 65%
Gross margin: 81%
Net loss: $5 million
The Israeli company, founded in 2008, provides software to help programmers update and maintain their products. The company is doing a traditional IPO.
Pros: The company is almost profitable, reporting a loss of less than $500,000 for the first half of 2020. Its net revenue retention rate was 139%.
Cons: The style of software development that JFrog supports is not the way most developers release programs today and may not catch on.