On the last day of the New York Stock Exchange's busiest month ever for IPOs, two tech companies are taking a different approach to going public.
Software makers Palantir and Asana are launching direct listings on Wednesday, allowing existing shareholders to sell stock to new investors rather than raising money through a traditional share sale.
It's not the only thing they have in common. Both companies were born in the San Francisco Bay Area and financed by billionaires who made their fortunes from their early involvement in Facebook.
Palantir was co-founded in 2003 by venture capitalist and former PayPal CEO Peter Thiel, who parlayed a $500,000 investment in Facebook into a stake in the social network worth about $1 billion. He's still on the Facebook board, though he has substantially sold all of his stock.
Asana's CEO and co-founder Dustin Moskovitz was Facebook CEO Mark Zuckerberg's roommate at Harvard. As a co-founder of Facebook, he held a 7.5% stake prior to the 2012 IPO. He left Facebook in 2008 to start Asana, which sells cloud-based software for tracking group projects.
That's not all. Thiel's venture firm, Founders Fund, has been an Asana investor since 2012 and owns a 6.5% stake.
Thiel has a net worth of just over $2 billion and, through his various investing groups, controls Palantir shares valued at about $2.4 billion, based on a share price of $7.25.
Moskovitz's net worth is just over $15 billion, including his current Facebook holdings valued at over $8 billion. He owns $1.1 billion worth of Asana stock assuming a $21 stock price.
Those share values for Palantir and Asana are based on reference prices provided by the New York Stock Exchange on Tuesday and do not necessarily reflect where the stocks will open. Palantir traded as high as $11.50 in the private market in August, while Asana shares reached $28 that month, according to their prospectuses.
Unlike tech IPOs, which typically bake in a significant pop for new investors, the opening price for a direct listing is determined by the market maker and the issuing company according to actual demand. Because shareholders can decide at what price they're willing to sell, there's no inherent discount for new buyers.
Direct listings are often viewed as a more efficient way to go public than IPOs because companies aren't leaving money on the table. But there are downsides. There's currently no way for companies to raise primary capital through a direct listing. And because it's an open market, management teams don't get to decide who gets allocation and can't put together an all-star investor roster, which can help bring credibility to the table and draw other long-term investors.
In trying to determine how to value the two companies, investors have much more information on Palantir than on Asana.
The stock has been widely held by major public market investors for years and has been marked up and down in their books based on growth, profit expectations and economic conditions.
"Palantir has had a pretty active market for the stock with market-based pricing for years," said Kelly Rodriques, CEO of pre-IPO marketplace Forge, "It's been down, up, down and back up again."
Palantir's software is used by government agencies and large companies to collect, analyze and map out large data sets. The Defense Department announced Tuesday that it awarded Palantir a $91.2 million contract to provide research and development to the Army Research Laboratory over the next two years. The company said last week that revenue this year will increase 42% to $1.06 billion and that it will have an adjusted profit, excluding stock-based compensation costs, of $121 million.
But while its average customer spends over $5 million a year, Palantir has only 125 clients, raising concerns among software investors about its appeal. Palantir is pitching a story of expanding software margins that come with making the technology more easily and widely deployable.
Asana's trading volume has been much lower than Palantir's. While 660,000 to 17.7 million Palantir shares traded each month between April 2019 and August 2020, Asana's volume ranged from 2,000 shares to about 683,000 shares per month between February and August 2020.
Last October, Asana conducted a tender offer, allowing existing holders to sell 4.6 million shares at $15.82 apiece to big investors.
"When I look at Palantir and Asana, they can't be more different," Rodriques said. "Asana has had a lot less trading, and the secondary trades that happened have been largely buybacks."
Asana is also much smaller, generating revenue in the first half of the year of $99.7 million. But its growth rate of 62% was higher than Palantir's and its gross margin of 87% was above Palantir's margin of 72%.
Both companies are going public on the last day of the third quarter in what's expected to be the close of the IPO window.
There's plenty that could go wrong. U.S. stocks are wrapping up their first down month since March, led by a decline in tech companies, which have been the biggest outperformers for the year. In addition to election uncertainty, the economy remains troubled because of the coronavirus and there's no guarantee that Congress will be able to pass another stimulus bill to provide relief for those who lost their jobs.
Roger McNamee, who was an early investor in Facebook before becoming one of its loudest critics, said companies are savvy to go public while they can because of all the potential headwinds.
"The economy has been declining for the better part of a year and yet the market has until very recently continued to make new highs," said McNamee, co-founder of private equity firm Elevation Partners and author of the 2019 book "Zucked," which criticized Facebook's effects on society.
"These guys are very smart to take advantage of these market levels to get public because there may be a period in the not-too-distant future where it's really hard to do that."