Whether we like it or not it appears that Donald Trump has given investment markets a boost in the short term. While he obviously comes with a lot of baggage, this is a man who seems set to embrace the world of technology appointing advisers such as Elon Musk. So, it will be no surprise to learn that the number of IPOs announced in January has increased dramatically compared to the same period last year. So, is it really the political scenario which is helping IPOs or is it just pent up demand?
Up to 20 deals in the offing
A total of 16 IPOs have already been announced this month with four other companies set to raise further funds after recent IPOs. This is more than double the nine equivalent fund-raising exercises during January 2016. The latest to join the IPO train was Snap Inc. which is the parent company to the extremely popular communications app Snapchat. That IPO alone is set to value the company at the minimum of $25 billion so we can only estimate the total valuation for new IPOs for January.
Is this down to new confidence or pent-up demand?
Over the last couple of years there have been rumours and counter rumours of large IPOs but due to market volatility many of these were pulled. There was also the fact that there was a significant amount of private equity available to pre-IPO companies which was seen as a less risky option at the time. This year, even though there is still significant private equity available, market confidence has seen many technology companies in particular increase in their “perceived” value. As a consequence, it is no surprise that some of the technology companies are taking advantage of recent confidence, and an all-time high for the DJIA index, to raise some funds.
This will also give some private equity companies the opportunity to dilute their stakes in high-risk technology companies and bank some significant profits.
Investors looking for new ideas
Just last week we saw UK telecoms giant British Telecom succumb to accounting issues with its Italian subsidiary resulting in a multibillion pound share price collapse. This perfectly illustrates that even what many perceive to be “safe” investments do carry a certain degree of risk. So, many investors are now looking towards new ideas and the likes of Snapchat offer something different and perhaps more importantly, something which is difficult to value. Therefore, you could argue that the valuation of Snapchat is getting carried along on the crest of a wave.
Monetising large market shares
We only need to look at Facebook to see the initial difficulties the company had monetising its large customer base. The hope is that companies such as Snapchat will be able to learn from the problems experienced by Facebook and hopefully monetise their client base more quickly. This should hopefully result in a quicker increase in profits and a subsequent increase in the value of the company. However, as we saw with Facebook, this is not as easy as many would have you believe!
Staying ahead in the technology game is a challenge and while Snapchat is certainly the trend of the day, other communication apps will follow in due course. This theoretical valuation of Snapchat also answers a question on the lips of so many analysts, why did Facebook offer a “phenomenal” $3 billion for the company just a few years ago. Now we know….