Wall Street is abuzz with the news of two new tech IPO filings — called S-1s in the parlance — for crypto exchange Coinbase and cloud host Digitalocean. These two companies are doing solid business even during the pandemic. After all, what can people do when stuck at home but trade bitcoin and play with new websites?
But why these companies and why now?
Coinbase has been threatening to go public for almost a year now, starting last July when the company hinted at SEC filings that would make it one of the first decentralised financial companies to take part in a decidedly centralised process. “On July 9, 2020, Reuters reported that Coinbase was preparing to go public on the stock market sometime in the next several months, either in late 2020 or early 2021,” wrote Bitcoin Magazine last July. “The spokesperson for this announcement did so under complete anonymity, and with the proviso that the company as a whole would not comment officially on either this story or any rumours or speculation surrounding it.”
Crypto fans aren’t worried about the IPO’s effect on prices, however. Given the archaic nature of the IPO in general, many believe it’s a way to settle more firmly in the financial firmament.
“I think they are trying to go listed to gather more public funds to liquidate their financial position,” said crypto trader and founder of Smartportfolio.io, Andrew Se. “And they are trying to do it while the market is good. I’m not sure if they can pass the audit requirements, though.”
Some crypto fans are excited about the legitimacy this brings to the space.
“Coinbase going public is a fantastic milestone for the crypto industry,” said Ouriel Ohayon, CEO of ZenGo. “It brings it to the forefront of bespoke retail and industry. It will, however, add an extra layer of complexity and compliance requirement to Coinbase, which will be X-rayed even more than before in a space already heavily monitored.”
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Others are excited about going to the moon. “Fees too high for me personally but they gonna make BANK. It’s a buy,” wrote Openedge_4gl on Reddit.
The Digitalocean IPO is a bit more straightforward. Digitalocean is a cloud hosting company similar in part to Amazon’s AWS or Microsoft’s Azure. They are a smaller company by any measure, and the plan to go public takes them out of startupville and places them squarely alongside bigger players.
“DigitalOcean intends to list its common stock under the ticker symbol ‘DOCN’ on the New York Stock Exchange. The number of shares to be offered and the price range for the proposed offering have not yet been determined. The offering is subject to market conditions, and there can be no assurance as to whether, or when, the offering may be completed or as to the actual size or terms of the offering,” the company wrote in its filing.
The goal is to raise $US100 ($126) million for the company, which most recently raised $US50 ($63) million at a $US1.15 ($1.5) billion valuation.
But the more interesting question is, why now? The pandemic has poured gasoline on the stock market — which, we need to remember, is not the economy — in the belief that future returns will be far greater once everything returns to somewhat normal. In normal situations, the stock market as well as a desire to take part in the stock market reflects current conditions. The dot-com boom and bust arose when internet startups came to power, and many of the worst bubbles appeared when investors felt a fear of missing out on the next big thing.
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More companies aren’t going for IPOs for a few reasons. First, there’s a sense that this isn’t the right time. With an overheated market full of retail (aka Robinhood) investors, your chances of seeing a sane market run-up are slimmer. The result could be a huge crash in stock price almost immediately — not something boring old Wall Street wants.
Further, a company like Coinbase is unique in that it is one of the few alternative finance companies to have the legal cover to go public. SEC guidelines are very onerous and the audits before IPO are strenuous. Coinbase itself is doing well by any measure, hitting a profit of $US322 ($405) million on revenues of $US1.2 ($2) billion in 2020. Digitalocean, with $US300 ($377) million in revenue in 2020, is in the same realm although not as frothy as Coinbase.
So the simple answer is that these IPO outliers are portents of what is to come as much as a reflection on current market conditions. In fact, 2020 was a massive year for IPOs, especially thanks to so-called SPACs or special purpose acquisition companies, which are essentially shells that go public in order to acquire a certain non-public company. Imagine a hermit crab that scuttles into an empty home and you get a general idea.
So yes, in this economy tech is going big on Wall Street. What that means for the retail investor is more boom and bust and, obviously, it means big payouts for already-wealthy C-level folks and investors. And, in the end, isn’t that what we’re all looking for?