If some Israeli start-ups dream of being the target of a Waze-style buyout by the likes of Google, Apple, Amazon, or some other tech giant, others aspire to go public, preferably on the Nasdaq stock exchange. Traditionally considered the place for a tech company to list shares, Nasdaq has in recent years become very popular with Israeli companies.
But Nasdaq isn’t for everyone, according to Adam J. Epstein, an investment professional who specializes in advising small-cap companies (generally defined as companies with less than a billion dollars of market capitalization) on financing options, including issuing initial public offerings, usually on Nasdaq. Since 1980, over 250 Israeli companies have issued IPOs on Nasdaq; many of those companies have been acquired, while some have gone out of business. The Israeli companies that make it on Wall Street, in the sense that their stocks survive for the long term and become popular among institutional investors, are few and far between.
A good example was last week’s back-to-back IPOs, one by Israel-based website builder tool provider Wix.com and the other by social network giant Twitter. The Israeli IPO did well by general standards; initially expected to raise $119 million, Wix’s IPO raised $127 million. Wix, with some 40 million users and 400 employees, had $34.1 million in revenues in the first half of 2013, a substantial jump over the $43.7 million and $24.6 million it brought in in 2012 and 2011 respectively, based on its “freemium” business model in which users get basic services for free and pay for premium services. Based on the IPO figures, said analysts, Wix was being valuated by investors as being worth $750 million. Overall, it was a good day for Wix, and for Israeli high-tech.
But the contrast to the next day’s IPO — that of Twitter — was jarring. Twitter, of course, is much better-known than Wix, and its imminent IPO topped the business news for months. Revenue was $259 million in 2012 (the company expects that to jump to $400 million in 2013). In the first half of 2013, Twitter posted revenue of $253.6 million but had a loss of $69.3 million, it revealed in its IPO filing last week. With 2,000 employees, Twitter has grown substantially in the past several years. It raised over a billion dollars in its IPO.
Those numbers make sense — Twitter reports 554 million active registered users. But the real story was investor response to the IPOs. While the response by investors to the Wix IPO was respectable, the response to the Twitter IPO recalled the first Internet bubble, as investors bid up the initial offered price of Twitter stock to the extent that it closed 73% higher by the end of the day. The fact that Wix has a solid business model (premium services, an “app store”) as opposed to Twitter (which gets all its revenues from advertising, like so many other web services) seemed not to impact on investors’ very positive response to the Twitter IPO, and the merely respectable one to Wix’s.
Wix and most other Israeli companies on the Nasdaq can only dream of a Twitter-ish enthusiasm level, Epstein told The Times of Israel in an email interview. “The typical Israeli Nasdaq company is a micro-cap company in US stock market lingo, with a capitalization of up to $300 million, and micro-cap investors are quite provincial,” said Epstein. “In other words, the smaller the company, the larger the risk, and the larger the risk the more companies are penalized for not looking and feeling like American companies. These risks are exacerbated when you can’t easily visit the company, English isn’t management’s first language, professional service providers aren’t widely known to US investors sometimes, and companies file regulatory reports as foreign issuers.”
Nasdaq is traditionally home of small-cap stocks (a preponderance of the 5,000-plus companies listed on the Nasdaq index are small-caps), but because of those size and culture issues, many of the Israeli micro-cap companies on the Nasdaq should perhaps by rights be trading on the “pink sheets” — the Over The Counter Bulletin Board, where market caps are smaller and analysis is often lacking.
Based on his research earlier this year, Epstein concluded that approximately one-third of Israeli companies listed on Nasdaq have market capitalizations of $100 million-$300 million. Of those companies, 80% have daily trading volume that is less than the median Nasdaq daily trading volume for similarly sized companies; average institutional ownership is 17%, whereas the Nasdaq average for similarly sized companies is 58%; and average number of equity research analysts is 1.7, whereas the Nasdaq average for similarly sized companies is 4. Taken together, he said, those figures indicate that most Israeli stocks are trading very marginally, and that after their IPOs, investors, especially institutional investors like investment houses and investment banks, tend to ignore them.
Wix, which based on its IPO figures is at least a small-cap company and is well-known around the world, may have been kept back from even greater potential success by its Israeli roots, said Epstein. “There certainly are precedents for great Israeli technology success stories on Nasdaq: Check Point, Elbit, and Nice, to name a few. But US institutional investors are also mindful that more than 70 percent of Israeli-domiciled companies listed on Nasdaq have less than US$350 million market capitalizations.”
Institutional investors, like investment banks, are often in for the long haul and want to put their money to work where it will be most effective. “Institutional investing is a numbers game; and few Israeli companies manage to break through to become multi-billion dollar companies on US stock exchanges,” Epstein said.
Is Nasdaq a dead end for all but the largest Israeli companies? Would Israeli start-ups that have matured be better off trying to sell out to a tech giant? Not necessarily, said Epstein; there are steps even small companies can take to raise their profile among big US investors. Institutional investors look for certain things before they even consider investing in a company, like institutional sponsorship (getting a big investment bank or Wall Street trading house to back an IPO) and enough information for analysts to issue reports on a company’s business.
Without that information and market support, investors are going to stay away from a stock — and if you can’t generate interest among a wide range of investors, your stock is going nowhere. “Market valuations aren’t what they seem if a stock is poorly traded, because a single large seller can have an austere impact on the stock price in an instant. It’s impossible to overemphasize how important trading volume and institutional sponsorship are for Israeli companies listed on Nasdaq,” said Epstein.
“For better or worse, Nasdaq is a US stock exchange,” Epstein added. “Accordingly, all things being equal, the more your foreign-domiciled company looks and feels like an American company the better your stock will perform. Think about it the other way around; if a US-based company decided to list exclusively on Tel Aviv Stock Exchange but only visited Israel sporadically, and was far from an expert regarding Israeli capital markets, Israeli customs, or Israeli business practices, how well do you think that company would perform relative to its Israeli-domiciled peers?
“Israel is a world leader in so many things. With some willingness and education their stocks could perform much, much better on Nasdaq.”