A public/private split in Apptio’s IPO

Contact: Brenon Daly

Apptio soared onto Wall Street in its debut, pricing its offering above the expected range and then jumping almost 50% in early Nasdaq trading. The IT spend management vendor raised $96m in its IPO, and nosed up toward the elevated status of a unicorn. However, in a clear sign of the frothiness of the late-stage funding market a few years ago, Apptio shares are currently trading only slightly above the price the institutional backers paid in the company’s last private-market round in May 2013.

That’s not to take anything away from Apptio, which created some $850m of market value in its offering. (Our math: Apptio has roughly 37 million shares outstanding, on an undiluted basis, and they were changing hands at about $23 each in midday trading under the ticker APTI.) That works out to a solid 5.4 times 2016 revenue, which we project at about $157m. (Last year and so far in the first half of 2016, Apptio has increased sales in the low-20% range. That growth rate, while still respectable, is about half the rate it had been growing. We suspect that deceleration, combined with uninterrupted red ink at the company, help explain why Wall Street didn’t receive Apptio more bullishly.)

In midday trading, Apptio’s share price was only slightly above the $22.69 per share that it sold shares to so-called ‘crossover investors’ Janus Capital Group and T. Rowe Price, among other investors, in its series E financing, according to the vendor’s prospectus. A relatively recent phenomenon, crossover investing has seen a number of deep-pocketed mutual funds shift some of their investment dollars to private companies in an effort to build an early position in a business they hope will come public and trade up from there.

However, given the glacial pace of tech IPOs in recent years as well as the overall deflation of the hype around unicorns, that strategy hasn’t proved particularly lucrative. In fact, many of the price adjustments that mutual funds have made on the private company holding have been markdowns.

But the institutional investors would counter that the short-term valuation of their portfolio matters less than the ultimate return. For the most part, we’ve seen conservative pricing of tech IPOs in 2016. (Twilio, for instance, has more than doubled since its IPO three months ago.) Apptio probably doesn’t have the growth rate to be as explosive in the aftermarket as Twilio, but it can still build value. That’s what investors – regardless of when they bought in – are banking on.

Recent enterprise tech IPOs*

Company Date of offering
Pure Storage October 7, 2015
Mimecast November 20, 2015
Atlassian December 10, 2015
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016

*Includes Nasdaq and NYSE listings only