Technology IPOs

The technology sector is one of the key pillars of the IPO market, thanks to ample venture funding in high-growth tech startups. The sector is often characterized by fast growth and high gross margins. Tech companies have the potential to be highly profitable in the long term, but are commonly unprofitable in the near term due to heavy investments in product development and sales and marketing. More than other sectors, tech has a reputation for producing IPOs that can 2x or even 10x your investment; however, high-margin businesses attract intense competition, and technological advances can quickly turn pioneers into also-rans.

Software investors may look for elite companies that meet the "Rule of 40," where the year-over-year growth rate plus the EBITDA margin (or cash-flow margin) is 40% or more, but there is no hard-and-fast rule for a successful IPO investment. When analyzing a tech company, look for a product that is winning market share, an expanding and recurring revenue stream, a pathway to profitability, and a fair valuation. Technology IPOs are typically valued on EV/sales, as well as EV/gross profit, EV/EBITDA, and P/E.