The soaring debut of Nutanix last week in its first day of trading on its initial public offering may create new opportunity for other firms to go to the public markets. That might not be a great thing.
The data storage company fetched a market capitalization of $5 billion right out of the gate. What boosted the stock to such heady levels? The market did indeed rally that day, after a few days of worries over the banking system. That culprit on that downturn, was of course Deutsche Bank, and general investor worries about capitalizations and interest rates. So in this case a rising tide served to lift the newest of the boats to set sail. But investors who did not get in on the ground floor, so to speak, should ponder what the latest eye-popping ascent means for tech stocks and a once-moribund IPO market. Consider the fact that fellow IPO travelers Twilio and Acadia Communications trade at several times the levels where they went public. The enthusiasm has been infectious, but it may be dangerous. There are just too many bumps in the road near term to get cheered about companies that do come public.
Despite the fact that 16 firms went public last month — and no, not all of them were tech outfits — the doors may be closing. It could be the case that venture capital and private investors, and owners want to get in before a few events come through. Among those events: A contentious general election, where Congress is almost certainly going to keep looking at big banks, and how they get their money. Should there be reel traction in the calls to break the biggest outfits up, investment banking, trading and other market-derived revenues could stall. In addition, interest rates may have an outsized effect on markets.
If rates go up significantly, or the impression is there among investors that rates will go up significantly, then stocks will fall.And of course, no one wants to be left holding the bag on that. Venture capital firms that have been, in the past, open to funding companies (unicorns, anyone?) have been a bit leery of loosening the purse strings, and total investments were down 11 percent year over year in the second quarter of this year compared to 2015.
If investment firms continue to sit on cash, down the line that implies fewer startups able to go public (without access to the funds that can sustain them to that eventuality). Euphoria has a funny way of wearing off when investors take stock of the uncertainty that is around the corner.