Twilio's Success Is the Exception, Not the Rule, in Today's IPO Market

Twilio's (TWLO) market debut Thursday far surpassed expectations but the IPO market still hasn't come to life.

Twilio priced at $15 per share, ahead of the $12 to $14 range it provided, raising $150 million. The stock opened Thursday at $23.99, or 59.9% above the IPO price. Shares closed $28.79, up 92%.

The cloud cloud communications company is now worth over $2 billion, ahead of previous valuations. A July 29 Series E round reportedly valued it at just over $1 billion, while Renaissance Capital estimated a valuation closer to $950 million.

While venture capital backers Bessemer Venture Partners, Union Square Ventures and Fidelity are probably pleased with the strong exit, more such debuts are unlikely in the near term.

"A lot of people are trying to force that story" that the tech IPO market has recovered, Kaylan Tildsley of Triton Research said in a phone interview. "Twilio is the third tech debut of the year, and the first of the traditional venture-backed Silicon Valley mold."

The others were Dell's cybersecurity spinoff SecureWorks (SCWX) and Acacia Communications (ACIA) , a fiber optics group.

Twilio's IPO succeeded despite the abysmal IPO market, Tildsley asserted, because of its sound underlying business model, rather than a newly reinvigorated IPO market.

"At the end of the day, Twilio is a good company," she said. Triton assigned it a rating of 7.2 out of 10, ahead of the firm's average rating of 6.5 "Solid growth, solid management, Goldman [ Sachs] brought it public" as one of the lead underwriters along with JPMorgan.

Another source of strength was an oversubscribed IPO. Mutual fund group T. Rowe Price, for example, which participated in the Series E round, indicated an interest in purchasing up to 1.5 million shares in the IPO.

"The deal was favorable-between the other holders and T. Rowe there wasn't a lot to go to the market," Tildsley asserted. "I think it was 10 times covered."

Triton analysts believe that for the most part, the only companies going public are those which can't secure capital elsewhere. Ride-sharing startup Uber, for example, "seems to raise another billion every day," Tildsley said.

"Our thesis on Twilio and other tech IPOs is you're going to see good companies go public and you're going to see bad companies with no money going public," she explained. "If you're a marquee company like Uber, you're not having any problems raising money privately. There's less scrutiny. Not many tech companies on the public markets have traded well. There's new volatility. It brings on a huge onslaught of issues, and most of them are high growth and have enough issues."

Some companies have filed for an IPO but are waiting an unusually long time to actually go public, which Tildsley attributes to a hope that a buyer will come forward. Storage company Nutanix, for example, filed for an IPO in December and has neither withdrawn its filing nor moved forward.

Nutanix may have learned from the mistakes of a competitor, KKR & Co. (KKR) -backed Pure Storage (PSTG) , which went public within range in October and then quickly fell in its first days of trading, currently trading below its IPO price.

PointClickCare and Vizio are similarly taking a wait and see approach.

"You're seeing a lot of these unicorn companies that aren't Uber and Airbnb are hedging by keeping that filing live, running almost a dual-track process," Tildsley said.

Cybersecurity company Blue Coat Systems successfully ran such a stealth dual-track process. Weeks after the private equity-backed company filed for an IPO, it was acquired by rival Symantec (SYMC) for $4.65 billion.

The tech IPO market is unlikely to improve, Tildsley added, until a well-known unicorn successfully debuts and lends confidents to other startups.

"You're going to have to see one of these 'name brand' companies go public and for it to go well," she said. "The first thing I think of is Spotify. A better one is Airbnb-it's a good company, they have that name recognition."

Goldman, Sachs & Co. and JPMorgan Securities LLC are the lead underwriters for Twilio's offering, with Allen & Co. LLC, Pacific Crest Securities, JMP Securities LLC, William Blair & Co. and Canaccord Genuity Inc. also participating.

Anthony McCusker and Rezwan Pavri of Goodwin Procter LLP are advising Twilio on the IPO. Tad Freese, Christopher Kaufman, Brian Paulson and Nicole Fritz of Latham & Watkins LLP represent the lead underwriters.

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