Israeli tech shares traded on Wall Street have taken a battering in recent months, along with their global counterparts, as the specter of higher interest rates has pushed investors toward less risky, more traditional assets, triggering a tumbling in tech valuations.
In addition to inflation woes, global stock markets suffered a sell-off Thursday amid the Russian invasion of Ukraine, as investors piled into safer assets such as gold and European and US government bonds. The UK and European stock indices have tumbled, with Brent Crude, the global oil benchmark, surging above $5 a barrel for the first time since August 2014.
The drop in valuations will make Israeli tech firms, both on the public and private markets, more vulnerable to takeovers, and cause a surge in merger and acquisition deals, said Sergey Vastchenok, a senior analyst at Oppenheimer.
“We will see more and more international companies coming to hunt for Israeli firms at some very attractive valuations,” he said. “Intel’s acquisition of Tower Semiconductors may signal a first of additional deals this year. M&A deals are likely to flourish.”
Growth stocks from Meta, formerly Facebook, to Netflix are getting hit by a three-pronged threat of high inflation, rising interest rates and disappointing growth rates.
“It is all a matter of asset allocation,” said Vastchenok in a phone interview. “When the cost of capital is cheap, investors are happy to invest in growth companies” that are perceived as more risky businesses. “But when rates rise, investors prefer the more solid, traditional-economy firms, and have little appetite for risk.”
Central banks globally are mulling their policy steps and giving strong indications for interest rate rises as inflation levels surge, amid a global supply crunch triggered by the pandemic. US Federal Reserve Governor Michelle Bowman said on Monday that she was open to raising interest rates by more than the traditional quarter-point at the central bank’s upcoming meeting in March. And the Bank of Israel on Monday signaled a future interest rate rise, citing the nation’s strong economy.
“In the past few months inflation has surged and there are expectations of a rise in interest rates in the US,” said Vastchenok. “This is compressing the valuations of growth companies.”
According to data compiled by Oppenheimer, Israeli stocks traded on Wall Street have declined an average 47% from the shares’ highest points in the 12 months, or 52 weeks, to Friday Feb. 18, and an average 16% since the start of 2022. This compares with an 18% drop from its 52-week high for the tech-heavy Nasdaq Composite Index and a 20% decline year to date.
Over the course of 2021, Israeli tech companies raised a whopping $25.6 billion in private investments, as central banks boosted liquidity in the markets to keep the economies afloat during the pandemic lockdowns. The figures shattered a previous record of $10.3 billion in funding in Israeli tech firms in 2020, according to data compiled by IVC Research Center and the law firm Meitar.
There was also a record-breaking number of initial public offerings last year, 75, at an aggregative post valuation of $79 billion. Of the 75 IPOs, 23 were on Wall Street, according to the IVC-Meitar data, with the rest on the Tel Aviv Stock Exchange. In addition, 13 companies preferred to take the SPAC (special purpose acquisition companies) route, raising a total of $2.93 billion on capital markets.
Israel’s economy rebounded in 2021, surging 8.1%, the highest growth in 21 years, after contracting some 2.4% in 2020 amid the pandemic. The economy is projected to grow 5.5% this year, according to the Bank of Israel, and 5% in 2023.
The tech industry has been instrumental in the nation’s economic recovery, as it not only kept going, with workers plugging into their computers from home, but even thrived during the pandemic as demand for technologies surged as the world turned online. From yoga classes to shopping, working and studying from home or clinching deals, everyone needed computers, websites and apps inorder to survive the pandemic economically.
“In a post-coronavirus world, in which money doesn’t flow as easily as during the pandemic and interest rates are higher, investors are paying more attention to real economy firms and at the reopening of the economy, at the price of those companies that thrived during the lockdowns and benefited from the pandemic,” said Vastchenok.
“We are in an opposite situation of what we were during the pandemic crisis,” said Vastchenok. “Now, coronavirus is out, and we are getting back to normal and valuations of tech firms and companies that thrived during the pandemic are taking a big hit.”
Shares in Global-e Online Ltd., an e-commerce platform, for example, have declined 61% from their 52-week high to Feb. 18, and 48% year-to-date. The company listed its shares on the Nasdaq in May.
Monday.com, a developer of a workplace collaboration and management platform, which held an IPO of shares in June at a $6.8 billion valuation, has seen its stock price decline 56% from its 52-week high to Feb. 18, and 36% year to date.
The shares of Monday.com declined 18% in pre-market trade on Wednesday, after it published its fourth quarter and full-year 2021 results. The company said annual revenue surged 91% year over year to $308 million, while net loss narrowed to some $137 million, from $171 million in 2020. Even if the company’s results beat Wall Street expectations, the shares dropped because the firm said it expects a higher operating loss in 2022, Vastchenok explained.
WalkMe, which listed shares on Nasdaq in June too, at a $2.5 billion valuation, has seen shares decline some 17% this year, and 53% from its 52-week high.
New York-based Lemonade, an online insurer that listed shares on the New York Stock Exchange in July 2020 at a market valuation of $1.6 billion, has declined 31% year to date (as of Feb. 18) and 84% from its 52-week high.
The declines have not passed over the older Israeli companies with shares traded in the US. Wix, a developer of software that helps companies build and operate websites, has declined 19% this year, as of Feb. 18, and its shares have dropped 64% from their 52-week peak. The firm’s valuation has plunged from a high $19.6 billion in February 2021 to just $4.83 billion a year later.
Wix, which held its IPO on the Nasdaq in 2013, said on February 16 that it posted a net loss of some $117 million in 2021, compared to a loss of some $167 million in 2020, as revenue for the year rose 29% to 1.27 billion, but costs of revenue surged and operating loss widened to $325 million from $199 million a year earlier. The company said it could not provide estimates for 2022, due to uncertainty caused by the coronavirus pandemic.
Vastchenok said that growth for these tech firms is expected to slow as post-COVID demand abates. Israeli firms have also seen costs rise: the strong shekel, which was among the strongest currencies in the world last year, has made salaries of Israeli workers more expensive, while wage levels have risen amid stiff competition for talent. Costs of digital marketing have also risen, said Vastchenok.
“This surge in costs has either added to losses or lowered profitability,” he said. “When the cost of money goes up, investors have much less patience for companies that are not profitable and grow less fast, or at a slower pace, than expected.”
Because many of the Israeli firms are new to the market, he added, they were among the first to be shed when the winds changed direction.
“It is a matter of last in, first out – in difficult times investors will stick with the companies they know and trust, not with the newcomers, whom they hardly know,” he said.
The lower valuations in the public markets will also reflect on the valuations of privately held tech firms, he said, with startups and growth companies putting off fundraising plans or initial public offerings.
Tech firms may also put the brakes on new hires, or let go of workers, to cap costs. “This shake-up will bring back rationality to the market and to salaries,” Vastchenok said.
The lower valuations will also make Israeli tech firms, both on the public and private markets, more vulnerable to takeovers.
IronSource, which merged with a SPAC in April at an $11.1 billion valuation, has seen its shares on the New York Stock Exchange drop 53% from their 52-week peak. The firm’s valuation is around $6.1 billion today.
Fiverr, a provider of online freelance services that held its IPO of shares in 2019 on the New York Stock Exchange, has seen its shares plunge 76% from their 52-week peak, according to Oppenheimer data. The firm’s valuation has dropped to some $3 billion from a peak of $11.5 billion in February last year.
“The decline of valuations in the public market is not specifically of Israeli companies,” as the drops are affecting tech firms globally, said Dan Shamgar, senior partner and high-tech practice lead at the Tel Aviv-based law firm Meitar.
The valuations at these Israeli firms are going down, along with those of other tech firms, he said, because they were perhaps too high, driven by the huge competition for transactions last year. But the businesses behind these Israeli firms remains “very strong,” Shamgar said.
“The vast majority of Israeli companies that went public in 2021 were companies with very significant businesses,” he said. They have significant expansion plans for the future and a “long-term growth strategy with solid products and client base and a broad product offering. These are definitely companies – in general – with solid business that … deserve to be publicly traded with high valuations.”
Markets tend to go up and down, he said. But the companies are “very healthy and promising.” When valuations are lower, he said, this affects the number of companies that are planning to go public.
“If I look at the pipeline for 2022 there are definitely fewer companies than in 2021 that are contemplating to go public,” Shamgar said. “But the candidates for going public are all companies with excellent business and amazing growth. These companies are still doing very well in terms of their business but they will probably change their priorities in terms of when to actually go public.”
The SPAC market today is also less attractive than it was last year. Because of increased regulatory scrutiny in the US, SPAC transactions are today “more complicated” than in the past, Shamgar said, and there is less investment money available for such transactions.
Because there are still many SPACs that were set up and are looking for deals, the structure is still a “viable option” to accessing the public markets, he said, but “it takes more time and more effort to get to a closure of a transaction.”
The lower valuations could indeed trigger an increase in merger and acquisition deals, with Israeli firms being sold off to the highest bidder, Shamgar said. But he believes that the determination of Israeli founders and entrepreneurs to hold on to their firms and grow them into industry leaders has not changed.
“The great shift we saw in the Israeli tech sector in the last few years is that more and more companies are looking to become long-term players in the relevant industries,” he said. “M&A obviously is a possibility but I see more and more founders and entrepreneurs who are looking to create global strong players that will last for a long period of time.”
“I think that most of these companies would look at this period as a temporary downturn that over time would be corrected by a return to the more significant increase in valuation,” he added.
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