Zendesk announced its initial public offering today, a modest one at $150 million, but the S-1 filing in some ways bears striking similarities to Box’s a couple of weeks ago in that there is a lot of red ink here.
Box also had a modest goal, although $100 million more than Zendesk’s at $250 million.
Zendesk wrote in the Risks section, “We have a history of losses and we expect our revenue growth rate to decline; as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability.” Box had a similar statement (as do many companies at this stage).
They added, “For the years ended December 31, 2012 and 2013, we also generated net losses of $24.4 million and $22.6 million, respectively.”
To be fair, companies in startup mode often burn a lot of cash building the business, so it’s not unusual to see losses on the books. In fact, Box, which filed for its own IPO last month, also reported substantial losses, but like Box which had substantial revenue growth, so does ZenDesk.
They reported, “From the year ended December 31, 2012 to the year ended December 31, 2013, our revenue grew from $38.2 million to $72.0 million, which represents an annual growth rate of 88%.”
The statement went onto say that such growth is probably not sustainable, but it does show that company is in a substantial growth period right now.
Its worth noting, Box’s growth rate was pegged at 110 percent for the 12 months prior to filing their S-1.
But as we see more cloud startups entering the IPO phase, it’s reasonable to ask how Wall Street will greet them. In a report in yesterday’s Wall Street Journal, Opening the Box on Tech Stocks’ Next Move (may require registration), Wall Street appears to be having a love-hate relationship with cloud start-up stocks.
The story points out that investors have been enamored with these stocks, and the more traditional companies like Cisco, IBM and Oracle have suffered. The article goes onto say that over the last month there has been a minor shift to these more traditional companies –although they still lag the NASDAQ substantially over the last year.
As companies like Box and Zendesk have their coming out parties on Wall Street later this year, it’s worth paying attention to the reaction and how well they do (or don’t do). As the WSJ article, pointed out:
“The willingness of the public market to continue bestowing high valuations on young companies that often lack profits will offer the biggest clue as to whether the recent selloff is a blip or something bigger.”
And that’s the rub. While these cloud companies could in all likelihood represent the future of how business gets done, it’s hard for investors, especially ones who have difficulty playing the long game, to be patient and wait for these companies to reach a level of maturity where they are turning a profit on a regular basis.
Alex Wilhelm also highlighted this volatility in a recent TechCrunch article, The Shifting IPO Market in which he pointed out not every tech startup that comes down the pike has been greeted kindly by Wall Street, at least out of the gate. Even Facebook suffered for a time before rebounding, but it’s clear that not every company that tries is guaranteed a big payday when they IPO.
For now, we will just have to wait and see how these new young turks fare as they make the transition to publicly traded companies and all that entails.