Wall Street’s ‘meh’ response to tech IPOs shows Silicon Valley’s valuation problem
Instacart celebrates their IPO at the Nasdaq on Sept. 19th, 2023.
Courtesy: Nasdaq
After a 21-month tech IPO freeze, the market has cracked opened in the past week. But the early results can’t be encouraging to any late-stage startups lingering on the sidelines.
Chip designer Arm debuted last Thursday, followed by grocery delivery company Instacart this Tuesday, and cloud software vendor Klaviyo the following day. They’re three very different companies in disparate parts of the tech sector, but Wall Street’s reaction has been consistent.
Investors who bought at the IPO price made money if they sold right away. Just about everyone else is in the red. That’s fine if a company’s goal is just to be public and create the opportunity for employees and early investors to get liquidity. But for most companies in the pipeline, particularly those with sufficient capital on their balance sheet to stay private, it offers little allure.
“People are worried about valuations,” said Eric Juergens, a partner at law firm Debevoise & Plimpton who focuses on capital markets and private equity. “Seeing how those companies trade over the next couple months will be important to see how IPO markets and equity markets more generally are valuing those companies and how they may value comparable companies looking to go public.”
Juergens said, based on his conversations with companies, the market is likely to open up further in the first half of next year simply because of pressure from investors and employees as well as financing requirements.
“At some point companies need to go public, whether it’s a PE fund looking to exit or employees looking for liquidity or just the need to raise capital in a high interest rate environment,” he said.
Arm, which is controlled by Japan’s SoftBank, saw its shares jump 25% in their first day of trading to close at $63.59. Every day since then, the stock has fallen, and it closed on Thursday at $52.16, narrowly above the $51 IPO price.
Instacart popped 40% immediately after selling shares at $30. But by the end of its first day of trading, it was up just 12%, and that gain was practically all wiped out on day two. The stock rose 1.8% on Thursday to close at $30.65.
Klaviyo rose 23% based on its first trade on Wednesday, before selling off throughout the day to close at $32.76, just 9% higher than its IPO price. It rose 2.9% on Thursday to $33.72.
None of these companies were expecting, or even hoping for, a big pop. In 2020 and 2021, during the frothy zero interest rate days, first-day jumps were so dramatic that bankers were criticized for handing out free money to their buyside buddies, and companies were slammed for leaving too much cash on the table.
But the lack of excitement over the past week — amounting to a collective “meh” across Wall Street — is certainly not the desired outcome either.
Instacart CEO Fidji Simo acknowledged that her company’s IPO wasn’t about trying to optimize pricing for the company. Instacart only sold the equivalent of 5% of outstanding shares in the offering, with co-founders, early employees, former staffers and other existing investors selling another 3%.
“We felt that it was really important to give our employees liquidity,” Simo told CNBC’s Deirdre Bosa in an interview after the offering. “This IPO is not about raising money for us. It’s really about making sure that all employees can have liquidity on stocks that they work very hard for. We weren’t looking for a perfect market window.”
Odds are the window was never going to be perfect for Instacart. At the tech market peak in 2021, Instacart raised capital at a $39 billion valuation, or $125 a share, from top-tier investors including Sequoia Capital, Andreessen Horowitz and T. Rowe Price.
During last year’s market plunge, Instacart had to slash its valuation multiple times and switch from growth to profit mode to make sure it could generate cash as interest rates were rising and investors were retreating from risk.
Growing into valuation
The combination of the Covid delivery boom, low interest rates and a decade-long bull market in tech drove Instacart and other internet, software and e-commerce businesses to unsustainable heights. Now it’s just a matter of when they take their medicine.
Klaviyo, which provides marketing automation technology to businesses, never got as overheated as many others in the industry, raising at a peak valuation of $9.5 billion in 2021. Its IPO valuation was just below that, and CEO Andrew Bialecki told CNBC that the company wasn’t under pressure to go public.
“We’ve got a lot of momentum as a business. Now is a great time for us to go public especially as we move up in the enterprise,” Bialecki said. “There really wasn’t any pressure at all.”
Klaviyo’s revenue increased 51% in the latest quarter from a year earlier to $165 million, and the company swung to profitability, generating almost $11 million in net income after losing $11.7 million in the same period the prior year.
Even though it avoided a major down round, Klaviyo had to increase its revenue by about 150% over two years and turn profitable to roughly keep its valuation.
“We think companies should be profitable,” Bialecki said. “That way you can be in control of your own destiny.”
While profitability is great for showing sustainability, it isn’t what tech investors cared about during the record IPO years of 2020 and 2021. Valuations were based on a multiple to future sales at the expense of potential earnings.
Cloud software and infrastructure businesses were in the midst of a landgrab at the time. Venture firms and large asset managers were subsidizing their growth, encouraging them to go big on sales reps and burn piles of cash to get their products in customers’ hands. On the consumer side, startups raised hundreds of millions of dollars to pour into advertising and, in the case of gig economy companies like Instacart, to entice contract workers to choose them over the competition.
Instacart was proactive in pulling down its valuation to reset investor and employee expectations. Klaviyo grew into its lofty price. Among high-valued companies that are still private, payments software developer Stripe has cut its valuation by almost half to $50 billion, and design software startup Canva lowered its valuation in a secondary transaction by 36% to $25.5 billion.
Private equity firms and venture capitalists are in the business of profiting on their investments, so eventually their portfolio companies need to hit the public market or get acquired. But for founders and management teams, being public means a potentially volatile stock price and a need to update investors every quarter.
Given how Wall Street has received the first notable tech IPOs since late 2021, there may not be a ton of reward for all that hassle.
Still, Aswarth Damodaran, a professor at New York University’s Stern School of Business, said that with all the skepticism in the market, the latest IPOs are performing OK because there was a fear they could drop 20% to 25% out of the gate.
“At one level the people pushing these companies are probably heaving a sigh of relief because there was a very real chance of catastrophe on these companies,” Damodaran told CNBC’s “Squawk Box” on Wednesday. “I have a feeling it will take a week or two for this to play out. But if the stock price stays above the offer price two weeks from now, I think these companies will all view that as a win.”
WATCH: NYU professor explains why he doesn’t trust SoftBank-backed IPOs
A DoorDash sign is pictured on a restaurant on the day they hold their IPO in New York, December 9, 2020.
Carlo Allegri | Reuters
Doordash on Tuesday announced the $1.2 billion acquisition of restaurant booking platform SevenRooms and reported first-quarter revenue that missed expectations.
Shares fell about 4% following the news.
Here’s how the company did, based on LSEG expectations:
- Earnings per share: 44 cents adjusted vs. 39 cents expected
- Revenue: $3.03 billion vs. $3.09 billion expected
Doordash said the all-cash acquisition of SevenRooms, a New York City-based data platform for restaurants and hotels to manage booking information, will close in the second half of 2025.
British food delivery service Deliveroo said Tuesday that they have agreed to a takeover offer from American rival Doordash worth $3.9 billion.
“We believe both SevenRooms and Deliveroo will expand our ability to build world class services that increase our potential to grow local commerce and support our financial goals,” Doordash said in a release.
Doordash reported total orders of 732 million for the quarter, an 18% increase over the same period a year ago. Analysts polled by StreetAccount expected 732.7 million.
The company said it expects second-quarter adjusted EBITDA of $600 million to $650 million. Analysts polled by StreetAccount expected $639 million.
“So far in 2025, consumer demand on our marketplaces has remained strong, with engagement across different consumer cohorts and types that we believe is consistent with typical seasonal patterns,” the company said.
Doordash reported $193 million in net income for Q1 2025, or 44 cents per share. The company had a net loss of $23 million, or a net loss of 6 cents per share, in the same quarter a year ago.
Doordash noted growth in the grocery delivery category, citing “accelerating average spend per grocery consumer and increasing average spend on perishables.”
The company did not mention tariffs as a factor in the financial outlook, but did note that an increased international presence leaves it open to “geopolitical and currency risks.”
doordash one-day chart
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Technology
Temu and Shein face massive tariffs. But don’t count them out of the U.S. e-tail scene, experts say
Photo illustration of the Shein app on the App Store reflected in the Temu logo.
Stefani Reynolds | Afp | Getty Images
The closure of a trade loophole and prohibitive tariffs on China have upended Temu and Shein’s business model in the United States. And yet the e-commerce companies are likely to remain a dominant force in American online retailing, experts suggest.
On Friday, the de minimis rule — a policy that had exempted U.S. imports worth $800 from trade tariffs — officially closed for shipments from China. This has seen Temu and Shein exposed to duties as high as 120% or a flat fee of $100, set to rise to $200 in June.
The small-package tariff exemption had been key to the companies’ ability to maintain budget prices on the merchandise they ship from China. Now that it’s gone, prices on Temu and Shein have been surging, with the former ending direct shipments from outside the U.S. altogether.
The change will be welcomed by many detractors of de minimis, among them U.S. lawmakers, labor unions and retailers, who have argued that Temu and Shein abused the exemption to undercut local businesses and flood the country with illicit and counterfeit products.
But despite the new trade challenges that Temu and Shein face, ecommerce and supply chain experts told CNBC that the companies are still capable of competing with their rivals in the U.S.
“Don’t count them out … Not at all. These kinds of Chinese e-commerce apps are very adept and agile. They have contingency plans in place and have taken the necessary steps to cover the tariffs from a margin perspective,” said Deborah Weinswig, CEO and founder of Coresight Research.
“I personally believe, if anything, [America’s e-commerce] game has been accelerating in favor of Temu and Shein … I wouldn’t be surprised if the competitiveness gap actually continues to widen,” added Weinswig, whose research and advisory firm works with clients across tech, retail and supply chains.
Contingencies in place
The loss of the de minimis exemption had long been anticipated, with U.S. President Donald Trump temporarily closing it in February. In preparation, Temu and Shein had been accelerating localization strategies for the U.S.
Scott Miller, CEO of e-commerce consulting firm pdPlus, told CNBC that Shein and Temu will continue to onboard goods from American sellers onto their apps to protect them from tariffs.
“Many of the current sellers on Temu and Shein are located in China or countries nearby, but not all. Local U.S. companies have been joining these platforms at an accelerating pace … several of our clients have onboarded or began the process of onboarding in just the past few months,” he said.
While margins for more localized brands and other sellers won’t be as high as those for China-based sellers on the platforms, they can be competitive, he said.
He added that in the case of Temu, vendors are attracted to lower fees, lighter competition and greater assistance with onboarding and setting up sales channels compared with what Amazon offers.
In recent days, Temu, which is owned by Chinese e-commerce giant PDD Holdings, has begun exclusively offering goods shipped from local warehouses to U.S. shoppers.
Many of those goods are still sourced from China but then shipped in bulk to U.S. warehouses, according to experts. While these bulk items are subject to tariffs, they also benefit from economies of scale.
This development is likely to see the variety of products on Temu scaled back, said Henry Jin, an associate professor of supply chain management at Miami University. However, he added, Temu is likely to resume direct shipments from China, depending on the outcome of the trade war between the U.S. and China.
Shein, meanwhile, has leaned into supply chain expansion, building manufacturing operations in countries such as Turkey, Mexico and Brazil, and reportedly plans to shift to Vietnam.
The company appears to still be shipping directly from China and likely has more room to absorb tariffs because of its “sky-high” margins in its core fast-fashion business, Jin said.
“If there’s one thing that Chinese companies are good at, it’s operating on a razor thin margin in an intensely competitive, if not adverse environment … they find every scrap that they can to survive,” he added.
Competitive prices?
Contingency plans aside, experts agree that Trump’s trade policy will continue to affect prices on Temu and Shein. The companies first announced they were raising prices in mid-April to counter tariffs.
According to data from Coresight, prices across shopping categories on Shein rose between 5% and 50% in the latter half of April, with the sharpest rises seen in toys and games and beauty and health.
However, many e-commerce experts remain confident that Temu and Shein will continue to prove price-competitive.
Coresight’s Weinswig said the two companies have previously been able to offer products at a third of the prices on Amazon for comparable goods. So, even if they more than double the prices to absorb the impacts of tariffs, many goods could remain cheaper than those on American e-commerce sites and retailers.
Jason Wong, who works in product logistics for Temu in Hong Kong, noted this dynamic when speaking to CNBC last month, likening Temu to a dollar store. If prices at the dollar store go from $1 to $2, it’s still a dollar store, he said.
Furthermore, Trump’s trade tariffs on China and other trade partners have also affected American retailers and e-commerce sites like Amazon.
Other advantages
When Forever 21 filed for bankruptcy protection earlier this year, it blamed Shein and Temu’s use of the de minimis exemption, which it said “undercut” its business.
But experts say that exclusively attributing the success of Shein and Temu to that trade loophole misses many of the other factors that have made them smash hits in the U.S.
According to Anand Kumar, associate director of research at Coresight Research, Temu and Shein owe a lot of their success to their very agile supply chains that adapt fast to consumer trends.
For example, Shein’s small-batch production — in which product styles are initially launched in limited quantities, typically around 100-200 items — allows it to test and scale products efficiently.
Another key is the companies’ applications, which use various strategies to maintain user interest, including frequent phone notifications, product recommendation algorithms and perhaps most notably, constantly displaying discounted prices from promotions and flash sales.
Temu was offering a “mega savings extravaganza” for American consumers on Monday. Some of the bestselling items on sale included stainless steel hook earnings for $1.45 and a fitted mattress pad for $11.54. It’s unclear if the discounted local goods were stockpiled before tariffs came into effect.
In addition, app users will often be met with mini-games that grant different coupons or ways to earn rewards, as well as opportunities to buy “mystery boxes” with assorted products.
That “gamification strategy” definitely plays into the consumer psychology of many U.S. shoppers who often buy items out of the excitement of being able to get a great deal, said Miami University’s Jin.
Experts also flagged that Temu and Shein have been very effective at marketing, including through the harnessing of livestreaming and social media.
On the other hand, according to Coresights’ Weinswig, American retailers have failed to adequately recognize threats from Temu and Shein and adjust their supply chains and pricing models.
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