Three Best Tech IPOs 2017: What to Love and What to Loathe

Tech IPOs 2017Best Tech IPOs 2017

A popular meme going around these days is celebrating 2016 as the worst year, one that will forever be looked upon in infamy and dread. But much of that ire is centered on political and humanitarian crises, while the financial markets—especially at the end of 2016—were, in general, experiencing positive gains (see: Dow Jones race to 20,000).

But one area where the market was a huge letdown was in exciting new tech initial public offerings (IPOs). The lack of tantalizing companies going public in 2016 has pushed a lot of focus on the most promising IPOs of 2017, with investors looking for the IPO to own for the next technology boom. So, just what are the best tech IPOs of 2017?

Why 2017 May Be a Great Year for Promising Tech IPOs

First, consider that 2017 could shepherd in the next tech boom, or at least be another step forward for the already-burgeoning tech market.

The reason there’s such optimism in 2017 for tech IPOs is that 2016 was such a letdown. The last time the market saw such few companies going public was in 2009, smack dab at the zenith of the Great Recession.

Volatility is the main culprit, with the Volatility Index (VIX) remaining steady and high throughout much of last year, with an average of 15.93. Despite the VIX being higher in 2015, it was far more uneven in its distribution, not to mention that the VIX spiked in each quarter during 2016, scaring off IPO-thirsty investors. (Source: “This Is Going to Be Worst Year for IPOs Since the Credit Crisis,” Bloomberg, December 20, 2016.)

So what we have here in 2017 is a more optimistic view of the markets coupled with a number of IPO-starved investors eager to cash in on the next tech boom, hoping that savvy investing in nascent public companies will translate into high profits.

So without further ado, here are the top 2017 tech IPO companies that are most likely to go public in the coming year.

Best Tech IPO: Snap Inc. Is the Most Anticipated IPO in 2017

For a company based around sharing short, impermanent snippets of time among friends, the Snapchat IPO has been quite the opposite: drawn out and very much in the public eye. But that doesn’t prevent it from being potentially one of the best tech IPOs of 2017.

Snap Inc., Snapchat’s parent company, reportedly filed for an IPO in the fall of 2016, with a rumored valuation as high as $25.0 billion. This news came near the end of the year, which would point toward a possible filing sometime this year.

To say that Snapchat is one of the most anticipated IPOs of 2017 is almost an understatement. The company reaches more than 150 million users a day, including 41% of the highly coveted 18- to 34-year-old demographic in the U.S., according to ratings agency Nielsen. (Source: “Snapchat Parent Files for $25 Billion IPO,” The Wall Street Journal, November 15, 2016.)

Marketers salivate at having such broad access to a group with a high amount of disposable income. But that doesn’t mean it’s been all rose petals and sunshine between ad agencies and Snap. The company’s tight controls on ad content and the long wait times some have experienced getting ads approved by the platform has soured parts of the relationship between advertisers and Snapchat.

Still, that’s hardly going to doom the company, and Snapchat has tried to address the issues by alleviating restrictions and improving its interface.

Ads have led to a high growth in revenue for the social media staple. Snap told investors that it expected to earn as much as $1.0 billion in 2017. Like many young companies (Snapchat only released a little over five years ago), the social media app is losing money, but that probably won’t scare away investors, seeing as this is highly common for tech companies in this situation. (Source: Ibid.)

Diversification represents a potential obstacle to future gains, but the company has shown plans for camera-equipped glasses called “Spectacles” that will record video in short bursts, and has other plans for expansion.

Perhaps the biggest threat to Snap is another company that was once a darling tech IPO itself: Facebook Inc (NASDAQ:FB).

Facebook has been trying for years to either acquire or ape Snapchat. FB stock’s most recent gambit, however, involves little more than outright duplication of Snapchat’s services via “Instagram,” a social media platform owned by Facebook.

The “Instagram Stories” section didn’t even bother changing the name in order to mask its inspiration, Snapchat’s “Stories.” Instagram has a few key advantages that could ultimately harm Snapchat. First, Instagram is the most-used social network for U.S. teens. According to Piper Jaffray Companies’ (NYSE:PJC) twice-annual survey, 32% of U.S. teenagers cited Instagram as their most important social network.

Then you have the recent rollout of Instagram’s monetization of its Stories feature. The company will present five-second photo and 15-second video ads between stories, according to Instgram’s blog. While similar to the advertisement model of Snap, what may tip the scale in Instagram’s favor is the backing of Facebook’s analytics and billions of dollars from which to draw.

Instagram Stories already boasts a strong audience: 150 million of Instagram’s daily active users access the feature, up from 100 million in October 2016. Snapchat, by contrast, announced 150 million daily active users in September 2016.  (Source: “Instagram’s Snapchat replica begins monetizing,” Business Insider, January 12, 2017.)

If Instagram’s growth trajectory holds up, then the company will likely be able to outpace Snapchat in terms of users, which could affect advertisement sales.

A final complication for Snapchat is that Instagram already has a great relationship with brands. According to Business Insider, almost 70% of all Instagram users follow a business, and these business have been able to capitalize on the platform, engaging audiences to such an extent that one-third of the most viewed stories are made by businesses. (Source: Ibid.)

Some big-name clients have lined up for Instagram’s ad integration, including tech giants like Netflix, Inc. (NASDAQ:NFLX).

Which is to show that there is definitely some reason for trepidation facing investors interested in a Snapchat IPO. But those possible concerns are hardly enough to counter the forward momentum for the company, maintaining it as one of the most promising IPOs of 2017.

Best Tech IPO: Dropbox

Dropbox Inc. is another one of the bigger-name tech IPOs that could reap huge profits for investors if everything goes according to plan, which is—of course—a huge “if.”

The file hosting service has been rumored to be going public for a long time, but some recent moves have pointed toward 2017 as finally opening the company up to investors. Bloomberg reported in August that Dropbox was in talks with advisers about a possible 2017 IPO. (Source: “Dropbox Is in Talks With Advisers for Possible 2017 IPO,” Bloomberg, August 15, 2016.)

Dropbox last received a valuation of $10.0 billion during a 2014 funding round but, since then, the file hosting industry has changed. Other companies have begun edging in on Dropbox’s territory, with tech behemoths like Alphabet Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN) offering their own rival services to that of Dropbox.

Question marks notwithstanding, there are still a number of reasons to be positive on a Dropbox IPO. Though not yet profitable, the company is free-cash-flow positive. The company achieved this through greater cost discipline and revenue growth, said the company’s Vice President of Product and Design Todd Jackson in June at the Bloomberg Technology Conference. (Source: Ibid.)

Factor in that the company has a large base of clientele from which to increase cash flow: some 200,000 businesses pay for Dropbox products, said CEO Drew Houston at Fortune’s Brainstorm conference last year. The company also lays claim to 500 million registered users.

Couple this large user base with the company’s expansion into more cloud-based features, and expansion in other areas beyond the bread-and-butter file hosting service, and what you end up with is one of the top 2017 tech IPO companies.

But a final cautionary note for investors interested in Dropbox is the pretty poor performance of its close competitor Box Inc (NYSE:BOX), which went public in 2015 to a $1.7 billion valuation, 29% below the valuation in a private funding round six months earlier.

Ultimately, time has not healed BOX stock’s wounds, with the company making a steady climb upward, but still trading at over 27% down from the IPO price.

The potential both for huge profits and huge downfalls is what makes Dropbox one of the most anticipated IPOs of 2017, if it does end up going public. Will the company be able to succeed on the budding wave of the next tech boom, or will it languish in the graveyard of over-hyped IPOs, or something in between? Whatever the case, Dropbox remains a tantalizing IPO option all the same.

Best Tech IPO: Hootsuite

The Canadian social media manager Hootsuite Media Inc. had a solid 2016, which opens up 2017 as a prime time for the company to go public.

While valuation of the company has by no means reached a consensus, many still view Hootsuite as a unicorn waiting to be set loose among public investors.

In 2016, the company set an internal goal of becoming cash-flow positive by the third quarter. It accomplished this feat one quarter early, according to CEO Ryan Holmes. (Source: “Social Media Software Startup Hootsuite Could Be Ready for an IPO,” Forbes, August 5, 2016.)

Outside funding for the company rests at about $250.0 million, which could point to a $1.0 billion valuation.

But regardless of the actual numbers involved, the one indisputable fact is that there is value to be had in the company.

Hootsuite counts 14 million users among its base, primarily focused on helping small businesses get off the ground with their various offerings to help manage their social media profiles. But, beyond the smaller fish, the company has begun reeling in some big catches as well. International Business Machines Corp. (NYSE:IBM) is just one of the larger companies that have taken advantage of Hootsuite’s tools.

The market is becoming crowded, however, as giants like salesforce.com, inc. (NYSE:CRM), Oracle Corporation (NYSE:ORCL), and Adobe Systems Incorporated (NASDAQ:ADBE) have begun encroaching on Hootsuite’s space.

But, as social media continues to play an ever increasing role in a company’s bottom line, the market is certainly present for Hootsuite to take advantage of, and investors may see the possibility for huge profits if the company fulfills its promise as a top 2017 tech IPO company.

A final boon in Hootsuite’s favor is the success of Shopify Inc (NYSE:SHOP). A Canadian e-commerce company with a similar outlook going into its own public offering, SHOP stock has performed excellently since its debut, gaining investors almost 70% on its shares since its May 29, 2015 IPO.

How to Invest in IPO

As with any IPO—and pretty much any stock—investors have to know the business, know the market, and be willing to ride the waves.

Part of the risk/reward dynamic in an IPO is that the price may undervalue or overvalue the company, and therefore lead to big gains or losses very early on. Another thing to remember is that most IPOs are looking to raise capital, and therefore are more interested in selling large amounts of shares to big investors, which can sometimes freeze out the average investor.

If you are determined to invest in an IPO, you may have better luck going through a bank managing the sale, an online venue, or a stockbroker who may invest in the IPO on your behalf. (Source: “Understanding IPOs,” Wells Fargo, last accessed January 16.)

Now let’s take a look at some real-world examples and strategies on how to invest in IPOs. Back to Shopify, the company spent several months of ups and downs until it hit a price at which investors became comfortable in early 2016. Since then, as mentioned above, the company has been a winner on the market.

Also as mentioned above, this is a common part of the feeling-out process between the market and a new IPO. An important thing to remember with IPOs is that the value can be subject to rapid shifts in the early goings.

Of course, not all IPOs follow a similar pattern. But if you look back at some of the biggest tech IPOs, like Facebook’s IPO, you’ll see that some of these trends tend to repeat themselves: shaky beginnings, followed by steady sustained growth over time. At least, that’s how some of the most desirable tech IPOs have ended up looking in the past.

Which brings us to the many potential profits for investors, as the most promising IPOs of 2017 will begin rolling out (hopefully) soon. If we are indeed living in the next tech boom, which is a fair assessment by most accounts, then there’s never been a better time for the most anticipated IPOs of 2017 to capitalize on the hype and goodwill.

As with all investments, IPOs carry inherent risk and non-guaranteed rewards. But getting in on the ground floor of a tech giant in the making can be one of the most profitable investments you can make. Just ask early investors in Tesla Motors Inc (NASDAQ:TSLA), FB stock, Bitcoin (BTC), etc.

Those are the success stories, and there are plenty of troubled IPOs out there to consider, but if 2017 fulfills its potential as a stellar year for tech IPOs, opportunities abound for the savvy investor to make some huge gains on what could amount to be the best tech IPOs of 2017.