Portfolio Management Tips For Technology IPOs

Some of the biggest wealth creators in the global IPO space have been technology IPOs anywhere in the world. If you consider the US markets, we have had mega technology IPOs like Amazon, Google, and Facebook in the last 20 years that have gone on to create big wealth for shareholders. In China, we have the recent IPO of Alibaba, which is the most valuable company in China. In India, we have had IPOs like Infosys and TCS that have created phenomenal wealth for the investors since their IPOs. What would be the broad portfolio management tips for technology investment in IPOs?

Portfolio management tips for technology IPOs

When investing in an IPO as a portfolio management exercise, there are some basic questions to ask. It is not that easy to create wealth through technology IPOs. For every Facebook, Google, Amazon, and Infosys, there are hundreds of technology companies that vanish without a trace. Here is a 5 point checklist.

1. Check out the business model and if the base model is really disruptive enough. The Amazon model was extremely robust and disruptive as it changed the way people shopped, not only in the US but across the world. Google and Facebook change the way companies and customers could actually reach out to each other. It is hardly surprising that these two companies corner the biggest chunk of online advertising revenues in the world.
2. As a portfolio manager, an IPO’s success will depend on the ability of the promoters and the top management to constantly innovate and rethink the business model. Take the case of Apple. Its products like the Mac, I-Pod, I-Phone and the I-Pad have all been revolutionary and have prised open new markets. Take the case of Amazon. It was not satisfied with its online marketplace. It soon got into delivering via Kindle Readers and then it made the big foray into cloud computing. Similarly, Google created the search engine but continued to innovate with the Maps software and the Android platform; both of which have been revolutionary. TCS and Infosys, in a much smaller way, have managed to adapt to the shifts from BFSI to Industrial software and then to Digital. As a portfolio manager, you need to focus on how the company creates a culture of constant innovation before committing money to the IPO.
3. Scale and monetization is the key if you want the technology model to sustain. What is the big difference between Facebook and Twitter? Both are revolutionary products and both have a huge captive audience. The difference is that Facebook-owned its customers better and monetized its database better. That explains the big gap in valuations. Look at the Indian context. The likes of Flipkart are being forced to sell out because they just burnt too much cash in the initial years. They are still nowhere close to being profitable and it will now require the muscle of a Wal-Mart to take the idea forward. Most Indian e-commerce companies have found it hard to create a profitable model even after over a decade in the business. Back in the late 1990s, Indian companies like Infosys and TCS managed to build scale riding on the back of the Y2K opportunity. That is the game that others like Patni and Mastek lost along the way despite having an equally long pedigree.
4. Pricing matters but you need to look at pricing in relation to growth. Many of the IPOs have been priced at levels that may be hard to justify using traditional parameters. But the likes of Google, Amazon, and Facebook have managed to sustain growth and that has kept valuations buoyant. The same cannot be said about the likes of Twitter, Instagram, LinkedIn, and WhatsApp. The last three were eventually forced to sell out. As a portfolio manager, you need to realize that the IT industry does not have space for too many leaders and only sustained leadership can create value. That is what companies like Google, Amazon, Facebook, TCS, and Infosys have proved.
5. Last but not least; prefer a business model for an IPO investment that is adaptable to increased automation. Eventually, that is the way all business will have to move. Let us get back to the Google model. Google created the search engine, the widely used maps, and the Android platform but operates with just about 85,000 employees globally. That is about 1/5^th the number of people that TCS employees. Google has a market cap of $900 billion against TCS $100 billion. That is what automation is all about. When you are an IPO investor, look for companies that are moving towards greater automation. The technology industry is increasingly moving from being a manpower driven industry to an automation driven industry.

As an investor in technology IPOs, your focus should always be on getting more value and greater disruption at a much more attractive price. That is the key to investing in technology IPOs.