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This 'frothy' IPO market for tech could mean bad news for the sector's future returns

Key Points
  • Bernstein highlighted tech IPOs such as Crowdstrike, Lyft, Uber, Slack and Zoom.
  • Of the IPOs on Bernstein's list, the average return since day one has been nearly 26%.
  • But Bernstein warns that there is a negative "correlation of Tech IPO activity and Tech sector returns."
CrowdStrike IPO at the Nasdaq exchange June 12, 2019.
Source: Nasdaq

A crop of long-awaited technology companies coming to the public market this year created a "frothy" period, Bernstein said on Tuesday, and a historical pattern may mark the top in the sector that has led the S&P 500 higher this year.

Of the tech IPOs that Bernstein highlighted – including Crowdstrike, Lyft, Uber, Slack and Zoom – the average return since day one has been nearly 26%. While Bernstein doesn't think this is yet at the level of the Dotcom tech bubble two decades ago, there is a negative "correlation of Tech IPO activity and Tech sector returns" that "is even stronger than that of the overall market," analysts Mark Moerdler and Zane Chrane said in a note to investors on Tuesday.

Meanwhile, the S&P 500 information technology sector, up more than 31% this year, has led the overall index to its recent record high. Bernstein says the correlation historically shows this kind of tech IPO activity leads to the tech sector dropping 6% over the next 12 months.

But that includes the drop following the 2000 dotcom bubble, Bernstein noted, and current performance may also be buoyed by the "better fundamental prospect of the current group of IPOs."

"Eliminating the year after the Tech Bubble from our data would suggest .. returns of +8%," Moerdler and Chrane added. "We suspect that, barring a recession, the fair expected return lies between those two estimates."

– CNBC's Michael Bloom contributed to this report.