x Abu Dhabi, UAETuesday 23 January 2018

Silicon Valley has a big smile on its face

While companies in other sectors struggle to go public, investors can't get enough of the tech shares, despite Facebook's woes.

The prospect of making a killing on the next Google is fuelling a boom in Silicon Valley technology IPOs. Richard Drew / AP Photo
The prospect of making a killing on the next Google is fuelling a boom in Silicon Valley technology IPOs. Richard Drew / AP Photo

Just two month's after Facebook's botched initial public offering (IPO), investors in the United States are once again lining up to pump cash into new Silicon Valley technology companies.

"The Facebook IPO destroyed a lot of wealth, which has yet to be recovered," says the Silicon Valley analyst Rob Enderle of the Enderle Group.

"On the other hand a lot of these people are desperate to recover their losses and will likely dig deeper in order to do so, which means they aren't likely to be as careful as they otherwise would."

The prospect of making a killing on the next Google is now creating a Las Vegas mentality among some investors. This is fuelling a boom in Silicon Valley technology IPOs.

"Like gamblers they are hooked, at least until they go under, and when you have folks eager to gamble, casinos do well and so, too, should IPOs," adds Mr Enderle.

In the first IPO of a consumer website since Facebook, shares of the online travel company Kayak Software opened 16 per cent above their initial price in its market debut on July 20.

The company had originally filed to have its IPO in May but decided to wait until the Facebook effect had time to dissipate. The IPO raised US$91 million (Dh334.2m).

The day before the Kayak listing, the digital security company Palo Alto Networks (Pan) and its shareholders raised more than $260m in an IPO. The company had a loss of $12.5m on revenue of $118.6m last year. In 2010, it lost $21.1m and had $48.8m in revenue. Pan has yet to make a profit.

These spectacular Silicon Valley IPOs are taking place at a time when companies in other industries and dependent on investor bases in other regions are struggling to go public.

Fender, a renowned guitar company whose clients have included rock stars such as the late Jimi Hendrix, called off its IPO the night before the Kayak Software listing, blaming the weakening economy in Europe.

But not all Silicon Valley pundits are gambling blind. Many believe they have identified companies with strong enough business plans to ensure huge future growth.

"When you look at the three companies to recently undergo an IPO - Palo Alto Networks, Kayak and Facebook - you see significantly different offerings and business models," says Alex Smith, a senior analyst at the international research firm Canalys based in Palo Alto.

"Palo Alto Networks in particular stands out from the others. When assessing its valuation, investors would have noted the following: it targets businesses, not consumers, which means it can plan for a more stable and predictable pipeline."

According to Canalys, worldwide investment in enterprise security is growing by 8.7 per cent a year and is expected to reach $22.9 billion by the end of the year.

"Investors like the future prospects of Pan and its IPO performance reflected that. The Facebook IPO has been well documented but in short, I think it highlights the gap that can be created between 'Silicon Valley hype' and 'business reality'," says Mr Smith.

Kayak Software, on the other hand, could be seen as more of a long shot. Rather than developing specific technology for a rapidly expanding market such as digital security, Kayak is dependent on consumer goodwill and the appeal of its brand.

"You will still have two types of investor, the professional who will like the security firm better and the gambler who will like Kayak better," says Mr Enderle.

And it looks as if the Silicon Valley area will continue to generate technology start-ups.

"Start-ups are a key attribute of the Bay area … Investors generally look to the Silicon Valley because there is a very good chance that the next big thing will come from here," says Mr Smith. He adds that Facebook and Google are no longer perceived as Silicon Valley's latest "cool" firms, those with huge growth potential.

New start-ups continue to bloom as many US and international investors prefer to gamble on technology rather than try and make a killing in the depressed stock market in the United States.

Property is often seen as the best benchmark of overall investor confidence in an area dominated by digital technology and Silicon Valley is reported as seeing record house prices in recent weeks.

When investors and entrepreneurs generate cash on grey trading of private shares or public trading of the stock post IPO, then this new money tends to buy local property.

"Real estate is very expensive here and sees a boom every time there is a major IPO. In the run-up to Facebook's IPO, the housing market here had a major spike," says Mr Smith.

"Anything that puts money in the hands of potential home buyers will excite realtors," says Mr Enderle. "Tech is doing relatively well still, it remains the one largely unchallenged US advantage."


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