Following a record-smashing tech IPO year in 2021 that featured the debuts of electric car maker Rivian, restaurant software company Toast, cloud software vendors GitLab and HashiCorp and stock-trading app Robinhood, 2022 has been a complete dud.
The only notable tech offering in the U.S. this year was Intel’s spinoff of Mobileye, a 23-year-old company that makes technology for self-driving cars and was publicly traded until its acquisition in 2017. Mobileye raised just under $1 billion, and no other U.S. tech IPO pulled in even $100 million, according to FactSet.
In 2021, by contrast, there were at least 10 tech IPOs in the U.S. that raised $1 billion or more, and that doesn’t account for the direct listings of Roblox, Coinbase and Squarespace, which were so well-capitalized they didn’t need to bring in outside cash.
The narrative completely flipped when the calendar turned, with investors bailing on risk and the promise of future growth, in favor of profitable businesses with balance sheets deemed strong enough to weather an economic downturn and sustained higher interest rates. Pre-IPO companies altered their plans after seeing their public market peers plunge by 50%, 60%, and in some cases, more than 90% from last year’s highs.
In total, IPO deal proceeds plummeted 94% in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young’s IPO report published in mid-December. As of the report’s publication date, the fourth quarter was on pace to be the weakest of the year.
With the Nasdaq Composite headed for its steepest annual slump since 2008 and its first back-to-back years underperforming the S&P 500 since 2006-2007, tech investors are looking for signs of a bottom.
But David Trainer, CEO of stock research firm New Constructs, says investors first need to get a grip on reality and get back to valuing emerging tech companies based on fundamentals and not far-out promises.
As tech IPOs were flying in 2020 and 2021, Trainer was waving the warning flag, putting out detailed reports on software, e-commerce and tech-adjacent companies that were taking their sky-high private market valuations to the public markets. Trainer’s calls appeared comically bearish when the market was soaring, but many of his picks look prescient today, with Robinhood, Rivian and Sweetgreen each down at least 85% from their highs last year.
“Until we see a persistent return to intelligent capital allocation as the primary driver of investment decisions, I think the IPO market will struggle,” Trainer said in an email. “Once investors focus on fundamentals again, I think the markets can get back to doing what they are supposed to do: support intelligent allocation of capital.”
Lynn Martin, president of the New York Stock Exchange, told CNBC’s “Squawk on the Street” last week that she’s “optimistic about 2023” because the “backlog has never been stronger,” and that activity will pick up once volatility in the market starts to dissipate.
Hangover from last year’s ‘binge drinking’
For companies in the pipeline, the problem isn’t as simple as overcoming a bear market and volatility. They also have to acknowledge that the valuations they achieved from private investors don’t reflect the change in public market sentiment.
Companies that were funded over the past few years did so at the tail end of an extended bull run, during which interest rates were at historic lows and tech was driving major changes in the economy. Facebook’smega IPO in 2012 and the millionaires minted by the likes of Uber, Airbnb, Twilio and Snowflake recycled money back into the tech ecosystem.
Venture capital firms, meanwhile, raised ever larger funds, competing with a new crop of hedge funds and private equity firms that were pumping so much money into tech that many companies were opting to stay private for longer than they otherwise would.
Money was plentiful. Financial discipline was not.
In 2021, VC firms raised $131 billion, topping $100 billion for the first time and marking a second straight year over $80 billion, according to the National Venture Capital Association. The average post-money valuation for VC deals across all stages rose to $360 million in 2021 from about $200 million the prior year, the NVCA said.
Those valuations are in the rearview mirror, and any companies who raised during that period will have to face up to reality before they go public.
Some high-valued late-stage startups have already taken their lumps, though they may not be dramatic enough.
Stripe cut its internal valuation by 28% in July, from $95 billion to $74 billion, the Wall Street Journal reported, citing people familiar with the matter. Checkout.com slashed its valuation this month to $11 billion from $40 billion, according to the Financial Times. Instacart has taken a hit three times, reducing its valuation from $39 billion to $24 billion in May, then to $15 billion in July, and finally to $13 billion in October, according to The Information.
Klarna, a provider of buy now, pay later technology, suffered perhaps the steepest drop in value among big-name startups. The Stockholm-based company raised financing at a $6.7 billion valuation this year, an 85% discount to its prior valuation of $46 billion.
“There was a hangover from all the binge drinking in 2021,” said Don Butler, managing director at Thomvest Ventures.
Butler doesn’t expect the IPO market to get appreciably better in 2023. Ongoing rate hikes by the Federal Reserve are looking more likely to tip the economy into recession, and there are no signs yet that investors are excited to take on risk.
“What I’m seeing is that companies are looking at weakening b-to-b demand and consumer demand,” Butler said. “That’s going to make for a difficult ’23 as well.”
Butler also thinks that Silicon Valley has to adapt to a shift away from the growth-first mindset before the IPO market picks up again. That not only means getting more efficient with capital, showing a near-term path to profitability, and reining in hiring expectations, but also requires making structural changes to the way organizations run.
For example, startups have poured money into human resources in recent years to handle the influx in people and the aggressive recruiting across the industry. There’s far less need for those jobs during a hiring freeze, and in a market that’s seen 150,000 job cuts in 2022, according to tracking website Layoffs.fyi.
Butler said he expects this “cultural reset” to take a couple more quarters and said, “that makes me remain pessimistic on the IPO market.”
Cash is king
One high-priced private company that has maintained its valuation is Databricks, whose software helps customers store and clean up data so employees can analyze and use it.
Databricks raised $1.6 billion at a $38 billion valuation in August of 2021, near the market’s peak. As of mid-2021, the company was on pace to generate $1 billion in annual revenue, growing 75% year over year. It was on everybody’s list for top IPO candidates coming into the year.
Databricks CEO Ali Ghodsi isn’t talking about an IPO now, but at least he’s not expressing concerns about his company’s capital position. In fact, he says being private today plays to his advantage.
“If you’re public, the only thing that matters is cash flow right now and what are you doing every day to increase your cash flow,” Ghodsi told CNBC. “I think it’s short-sighted, but I understand that’s what markets demand right now. We’re not public, so we don’t have to live by that.”
Ghodsi said Databricks has “a lot of cash,” and even in a “sky is falling” scenario like the dot-com crash of 2000, the company “would be fully financed in a very healthy way without having to raise any money.”
Snowflake shares in 2022
CNBC
Databricks has avoided layoffs and Ghodsi said the company plans to continue to hire to take advantage of readily available talent.
“We’re in a unique position, because we’re extremely well-capitalized and we’re private,” Ghodsi said. “We’re going to take an asymmetric strategy with respect to investments.”
That approach may make Databricks an attractive IPO candidate at some point in the future, but the valuation question remains a lingering concern.
Snowflake, the closest public market comparison to Databricks, has lost almost two-thirds of its value since peaking in November 2021. Snowflake’s IPO in 2020 was the largest ever in the U.S. for a software company, raising almost $3.9 billion.
Snowflake’s growth has remained robust. Revenue in the latest quarter soared 67%, beating estimates. Adjusted profit was also better than expectations, and the company said it generated $65 million in free cash flow in the quarter.
Still, the stock is down almost 20% in the fourth quarter.
“The sentiment in the market is a little stressed out,” Snowflake CEO Frank Slootman told CNBC’s Jim Cramer after the earnings report on Nov. 30. “People react very strongly. That’s understood, but we live in the real world, and we just go one day at a time, one quarter at a time.”
Alphabet CEO Sundar Pichai during the Google I/O developers conference in Mountain View, California, on May 10, 2023.
David Paul Morris | Bloomberg | Getty Images
Alphabet‘s stock gained 3% Friday after signaling strong growth in its search and advertising businesses amid a competitive artificial intelligence environment and uncertain macro backdrop.
“GOOGL‘s pace of GenAI product roll-out is accelerating with multiple encouraging signals,” wrote Morgan Stanley‘s Brian Nowak. “Macro uncertainty still exists but we remain [overweight] given GOOGL’s still strong relative position and improving pace of GenAI enabled product roll-out.”
The search giant posted earnings of $2.81 per share on $90.23 billion in revenues. That topped the $89.12 billion in sales and $2.01 in EPS expected by LSEG analysts. Revenues grew 12% year-over-year and ahead of the 10% anticipated by Wall Street.
Net income rose 46% to $34.54 billion, or $2.81 per share. That’s up from $23.66 billion, or $1.89 per share, in the year-ago period. Alphabet said the figure included $8 billion in unrealized gains on its nonmarketable equity securities connected to its investment in a private company.
Adjusted earnings, excluding that gain, were $2.27 per share, according to LSEG, and topped analyst expectations.
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Alphabet shares have pulled back about 16% this year as it battles volatility spurred by mounting trade war fears and worries that President Donald Trump‘s tariffs could crush the global economy. That would make it more difficult for Alphabet to potentially acquire infrastructure for data centers powering AI models as it faces off against competitors such as OpenAI and Anthropic to develop largely language models.
During Thursday’s call with investors, Alphabet suggested that it’s too soon to tally the total impact of tariffs. However, Google’s business chief Philipp Schindler said that ending the de minimis trade exemption in May, which created a loophole benefitting many Chinese e-commerce retailers, could create a “slight headwind” for the company’s ads business, specifically in the Asia-Pacific region. The loophole allows shipments under $800 to come into the U.S. duty-free.
Despite this backdrop, Alphabet showed steady growth in its advertising and search business, reporting $66.89 billion in revenues for its advertising unit. That reflected 8.5% growth from the year-ago period. The company reported $8.93 billion in advertising revenue for its YouTube business, shy of an $8.97 billion estimate from StreetAccount.
Alphabet’s “Search and other” unit rose 9.8% to $50.7 billion, up from $46.16 billion last year. The company said that its AI Overviews tool used in its Google search results page has accumulated 1.5 billion monthly users from a billion in October.
Bank of America analyst Justin Post said that Wall Street is underestimating the upside potential and “monetization ramp” from this tool and cloud demand fueled by AI.
“The strong 1Q search performance, along with constructive comments on Gemini [large language model] performance and [AI Overviews] adoption could help alleviate some investor concerns on AI competition,” Post wrote in a note.
An Amazon employee works to fulfill same-day orders during Cyber Monday, one of the company’s busiest days at an Amazon fulfillment center on December 2, 2024 in Orlando, Florida.
Miguel J. Rodriguez Carrillo | Getty Images
For 10 years, Aaron Cordovez has been selling kitchen appliances on Amazon. Now he’s in a bind, because most of his products are manufactured in China.
Cordovez, co-founder of Zulay Kitchen, said his company is moving “as fast as we can” to move production to India, Mexico and other markets, where tariffs are increasing under President Donald Trump, but are mild compared with the levies imposed on goods from China. That process will likely take at least a year or two to complete, he said.
“We’re making our inventory last as long as we can,” Cordovez said in an email.
Zulay is alsotemporarily raising the price of some of its milk frothers, smores roasting sticks and other products. The company’s popular kitchen strainer now costs $12.99, up from $9.99 before Trump announced his sweeping tariff proposal earlier this month.
Amazon merchants are hiking prices for everything from diaper bags and refrigerator magnets to charm necklaces and other top-selling items as they confront higher import costs. E-commerce software company SmartScout tracked 930 products on Amazon that have seen increased prices since April 9, with an average jump of 29%.
The price hikes affect a range of categories, including clothing, jewelry, household items, office supplies, electronics and toys.
The trade war with China has threatened to upend sellers on Amazon’s third-party marketplace, which accounts for about 60% of the company’s online sales. Many merchants are based in China or rely on the world’s second-largest economy to source and assemble their products.
Sellers are now faced with the conundrum of raising prices or eating the extra costs associated with Trump’s new tariffs. It’s an existential threat for many sellers, who subsist on razor-thin margins and have, for the last several years, dealt with rising costs on Amazon tied to storage, fulfillment, shipping and advertising fees along with pricing pressure from increased competition.
CEO Andy Jassy told CNBC earlier this month that the company was “going to try and do everything we can” to keep prices low for shoppers, including renegotiating terms with some of its suppliers. But he acknowledged some third-party sellers will “need to pass that cost” of tariffs on to consumers.
Amazon’s stock price is down 15% so far this year, sliding along with the broader market. The company reports first-quarter earnings next week.
Goods imported from China now face import duties of 145%, though Trump said Wednesday his administration is “actively” talking with China about a potential deal to lower tariffs. Chinese officials on Thursday denied that trade talks are taking place.
About 25% of the price increases observed by SmartScout were initiated by sellers based in China, said Scott Needham, the company’s CEO. Last week, stainless steel jewelry maker Ursteel hiked prices on four of its products by $6.50, while apparel brand Chouyatou raised the price of some of its dresses by $2. Both businesses are based in China’s Zhejiang province.
Anker, a Chinese electronics brand and one of Amazon’s largest sellers, has raised prices on one-fifth of its products sold in the U.S., including a portable power bank, which went up to $135 from $110, SmartScout data shows.
Representatives from Anker, Ursteel and Chouyatou didn’t respond to requests for comment.
Zulay, headquartered in Florida, is one of many U.S.-based sellers raising prices. The company is also cutting costs. Cordovez said he’s been forced to lay off 19% of his workforce and slash online ad spending by 85%.
Desert Cactus, based in Illinois, is also taking action. Joe Stefani, the company’s president, has been looking to move production of some of his brand’s college-themed merchandise out of China and into Mexico, India and Vietnam. About half of Desert Cactus’ goods come from China, while the rest are made in the U.S., Stefani said.
An Amazon worker moves a cart filled with packages at an Amazon delivery station in Alpharetta, Georgia, on Nov. 28, 2022.
Justin Sullivan | Getty Images
One of the company’s top products is a customizable license plate frame that’s manufactured in China. At the start of Trump’s first term in 2016, Stefani’s company paid import and shipping fees of 4% on the license plates. That rate has since skyrocketed to 170%, he said.
“The tariffs can’t stay this high,” Stefani said. “There’s so many people that just aren’t going to make it.”
Stefani said he expects Desert Cactus will end up raising prices on some products, though he’s worried shoppers might be put off by sticker shock.
“Will someone be willing to pay $50 for a hat on Amazon?” Stefani said. “You know it’s going to be expensive at the ballpark, but on Amazon we don’t know.”
Dave Dama, co-founder of health and beauty business Pure Daily Care, said the price to manufacture one of his skin-care products in China jumped to $25 from $10. Most Amazon sellers will have no choice but to raise prices, he said.
“If you were selling something for $40 and making a $7 or $8 profit at the end of the day, with these tariffs, those days are gone,” Dama said. “You can’t do that anymore. It’s unsustainable.”
Pure Daily Care plans to stagger price increases over several weeks, and only on products “we absolutely need to,” to keep Amazon’s algorithms from ranking it lower in search results or losing the valuable buy box, he said. The buy box determines which listing pops up first when a shopper clicks on a particular product, and the one that gets purchased when they tap “Add to Cart.”
An Amazon spokesperson said the company’s pricing policies continue to apply.
“As always, sellers set their own prices, and we regularly monitor how we highlight great prices as Featured Offers to provide customers with low prices across a wide selection,” the spokesperson said in a statement.
Dama said his company has enough inventory for some products to last up to six months, which it aims to “stretch as long as possible” in the hope that China and the U.S. can reach a trade deal. The company is also forgoing some sales promotions and discounts, while pausing spend on some display and video ads.
Regarding his inventory, Dama said, “We can try to stretch that seven, eight, nine months, which buys us a lot more time for this thing to work out, hopefully.”
Chinese start-up Pony.ai said Friday it will develop autonomous driving technology in partnership with Tencent Cloud and deploy robotaxi services on tech giant Tencent’s WeChat and other applications.
The Nasdaq-listed company which specializes in autonomous vehicle technology, particularly robotaxis androbotrucks, said in a press release that the deal will include cooperation in areas such as cloud services, map data, information security and intelligent cockpit ecosystems.
The arrangement will also see the two companies integrate Pony.ai’s robotaxi ride-hailing services within Tencent’s popular WeChat app as well as other applications like Tencent Maps.
Both companies had been in talks “for quite some time,” Pony.ai CEO James Peng told CNBC on the sidelines of the Shanghai Auto Show on Friday. He cited Tencent’s huge user base and its cloud offerings as factors supporting the “win-win” collaboration as the start-up continues to scale up.
Following the partnership, Peng said that “hopefully in the near future,” users would be able to call Pony.ai robotaxi rides straight through the WeChat app.
“Pony.ai possesses industry-leading autonomous driving technology accumulations, while Tencent excels in cloud services, mapping, and cockpit ecosystem technologies,” Vice President of Tencent Group and President of Tencent Smart Mobility Zhong Xiangping was quoted as saying in the Friday release.
“This strategic partnership between the two parties is not only about complementing each other’s technologies and resources but also marks a new starting point for collaborative innovation,” he added.
The release said that the partnership would also see both companies collaborate on the development, testing, and operation of Robotaxis, particularly in L4-level autonomous driving.
According to SAE International, L4 is a type of autonomous driving that allows drivers to take their eyes off the road in designated areas. For comparison, L3 is considered a hands-off system, but drivers must actively monitor the vehicle and be ready to take over the wheel.
The Tencent Cloud agreement comes a day after it was reported that Pony.ai unveiled its L4, seventh-generation robotaxi solution at the Shanghai Auto Show on Wednesday. The company’s shares surged about 40% in the U.S. on Thursday.
The start-up continues to establish itself as a prominent player in China’s autonomous driving industry. The company obtained China’s first permit to charge fares for fully driverless taxis in core parts of a business district of Shenzhen, where Tencent is headquartered.
However, the firm may be implicated in increasing trade tensions between China and the U.S. as the latter is a market Pony.ai considers “hugely important” to its expansion plans.
James Peng, co-founder and chief executive of Pony.ai this week reportedly told the Financial Times that the company is considering a secondary listing outside the U.S. amid mounting concerns that Washington will push for the delisting of Chinese companies off the New York Stock Exchange.
If this were to happen, it would come less than six months after the company’s initial public offering in the U.S. Notwithstanding, Peng told FT that a lot of factors need to be considered.