The wave of flotations of technology companies on the Tel Aviv Stock Exchange (TASE) is the most prominent feature of the revival of the local primary market. According to figures for 2020 supplied by the TASE, 18 of last year's 26 newly listed companies belong to the various branches of the technology sector. This is a peak not seen since 2007.
Several of these companies have yet to record any revenue, or have very low revenue indeed. Among these are Eccopia Scientific and BladeRanger, which have developed robots for cleaning solar energy panels, digital carton cutting and creasing company Highcon, advanced power solutions companies Aquarius Engines and GenCell, foodtech and agritech companies Millennium Foodtech, Smart Agro, and SavorEast, and medical device company Human Xtensions.
Some these IPO amounted to hundreds of millions of shekels. What most of them have in common is high demand from the financial institutions that took part in the offerings, and valuations mainly reflecting potential. Tales abound in the underwriting market of the institutions falling on the hot merchandise on its way to market.
In other words, some of these companies come to the stock market at an early stage, with IPO valuations not based on financial data such as cash flow, revenue, and p/e ratios, but rather on plans for future growth, the dreams they try (with considerable success) to sell investors before their offerings.
There were also IPOs by more established companies, such as Polyram Plastic Industries and Israel Shipyards Industries and others, where the p/e ratios on which their offerings were priced were fairly clear, and formed the basis for negotiations with the financial institutions beforehand.
"Flotations by better quality companies"
In the light of the high demand for the technology companies that made IPOs on the TASE recently, underwriters do not rule out the possibility of the formation of a "bubble" in the IPO pricings. "As far as valuations are concerned, the whole market is inflated," an underwriting source said, "mainly under the influence of what's happening on US exchanges, and so it's hard to determine at this stage, after the mad year we've been through, whether it's a bubble or not.
"We're in a situation now the like of which hasn't been seen for many years, in which it's possible to float a company on the stock exchange not on the basis of numbers but on the basis of stories. But we're not unusual in this, and the best example for understanding the state of the market is to look at the flotations that have taken place on Nasdaq."
At the same time, another source in the underwriting market said, "Actually now, because of the throng of companies wanting to list on the stock exchange, the filter has become finer, and you have to bring better companies.
"The IPOs coming to Tel Aviv now are of better quality companies, some of which hadn't thought of a flotation in Israel. You have to understand, though, that for these companies a flotation in Tel Aviv is not a real substitute for Nasdaq. All of them dream of a flotation in the US, and the offering on the local stock exchange is instead of a private fund-raising round, and leaves the dream of a Nasdaq flotation open for them."
"They don't come from the garage"
Tzach Kasuto, a founding partner at consulting firm Beta Finance, which was involved in ten flotations in 2020, mainly of technology companies, says, "The pricings at which the offerings were made are not high or divorced from reality. There's a correction of a historical distortion here, in which Israeli tech companies knew they had no reason to look at the local capital market, because if they held an IPO overseas they would be worth 100 million dollars, and if they held one in Israel they would be worth 100 million shekels.
"Even if they look young to the public market, it's important to realize that all the companies that came along have a track record going back years in the private market, after several fund-raising rounds, and a serious benchmark. If a company approaches a financial institution that knows that it has already been through fund raising rounds with sophisticated investors, and shows that its valuation rose with each round, that can make the institution feel confident that it's on solid ground."
Another consideration, says Kasuto, is that the activities in which the companies coming to the stock exchange engage ride on global trends. "There are therefore comparisons available with what is happening elsewhere in the world. It may not be as concrete as a supermarket, but there is certainly a basis. The pricings of those companies are not guesses.
"These are not companies amounting to two people in a garage with a Powerpoint presentation, and even if they look young to the stock exchange, they mostly have substantial work behind them and investment of millions going back years, only they are usually before the sales stage."
"A global trend"
As mentioned, the flood of technology IPOs on the local market in the past few months is supported by what has been happening in the US, where the Nasdaq index has hit a peak thanks to the growth in the business of technology companies during the coronavirus pandemic, making room for a welter of IPOs at very high valuations.
Technology indices on the TASE have also had a positive year, rising by 30-35%, and the weight of technology companies in the main index, the Tel Aviv 35, has also risen.
In its summing up of 2020, the TASE stated, "The coronavirus crisis contributed to the activity of the technology companies, most of them in remote working and ecommerce, and some in alternative energy, which is a growth industry."
IBI chief economist Rafael Gozlan says, "Technology is the big winner from the coronavirus crisis. Not only has this field not weakened, it has actually strengthened, because of demand and because everything has become more and more technology based, whether it's working from home or ordering goods from home. If you add to that near-zero interest rates and huge injections of money by governments, you get prices some of which will clearly not prove themselves. The low interest rates and government cash injections are very strong factors and create a situation not seen in normal times.
"What's happening in Tel Aviv is part of a global trend, not something local. There may perhaps be those who expect that because a technology company is Israeli, it should also be traded on the Tel Aviv Stock Exchange, but since the dot.com days it hasn't been like that, and the big, heavyweight companies generally go to markets in the US, while the smaller ones stay to make IPOs here. Even today, most Israeli technology companies look to the US market."
Published by Globes, Israel business news - en.globes.co.il - on January 7, 2021
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