Software IPOs are hot. Datadog is the most recent software IPO opening big. The software analytics firm initially sought to price 24 million shares at $19-$22, was quickly upsized to $24-$26, priced at $27, and opened at $40.35.
It is not alone. Software as a service (Saas), where a service provider gives customers access to applications through the internet — continues to grow rapidly.
The broad category of enterprise software — software that is sold to corporations as opposed to individuals — is among the most successful IPO categories this year, according to data compiled by Renaissance Capital. There have been nine such IPOs so far this year, raising $11.2 billion. Average return of those nine: 54%.
2019 Software IPOs
(from IPO price)
Crowdstrike — up 108%
Zoom — up 134%
Pagerduty — up 27%
Cloudflare — up 30%
Dynatrace — up 30%
Slack — down 1%
Source: Renaissance Capital
The reason for the high demand, Kathleen Smith from Renaissance Capital tells me, is threefold:
1) They are subscription models, which makes revenue more predictable;
2) They're enterprise-based, so you can sell to large numbers of people within the organization, which makes sales less expensive per person;
3) Most have positive cash flow because they collect revenue ahead of booking, so profits are fairly certain.
"That's the formula for IPO success," Kathleen told me.
Datadog is similar. "Datadog's combination of revenue growth, gross margins, operating margins, and key SaaS metrics are best-in-class amongst the Class of 2019 SaaS IPOs," MKM Partners Rohit Kulkarni said in a note this morning.
What's the downside? They have high valuations, Smith told me, which is what happened when Slack warned that the pace of growth was slowing in its first public earnings report a couple weeks ago.
"When there is fear in the market, these multiples contract," Smith said.