D2L Corp.'s and E Automotive's lacklustre trading debuts continue a streak of spotty performance for Canadian tech IPOs during the pandemic.Evan Buhler/The Canadian Press
Two Canadian technology companies had lacklustre trading debuts Wednesday, continuing a trend of underwhelming performance by many new issues that have flocked to the Toronto Stock Exchange of late.
Online learning software provider D2L Corp. of Kitchener Ont., which raised $150-million at $17 a share, saw its stock open at $16.49 Wednesday. It closed at $16.75, down 1.5 per cent from the issue price. D2L had cut its original offering from a planned $200-million raise and price range of $19 to $21 a share.
Despite the cool start, D2L chief executive officer John Baker told The Globe and Mail “I’m thrilled with the outcome … I hope this is just the start of a long journey as we build value for shareholders and clients. For me it’s not about day one, it’s about the long term.”
E Automotive fared little better. The Toronto company, which provides a digital automobile auction platform for dealers, had upped the size of its offering Tuesday to $135.7-million from $125-million, pricing its shares at the top end of its $19 to $23 range.
Despite opening at $26, E shares quickly fell back and closed at $23, unchanged from the issue price. IPOs are typically considered a success if the shares trades up strongly on the first day,
It’s the third straight underwhelming TSX debut by a Canadian tech company. Last week stock in investor relations software provider Q4 Inc. also traded below its $12 a share issue price during its first session on the TSX after it too slashed its IPO size and price.
It also continues a streak of spotty performance for Canadian tech IPOs during the pandemic despite the fact the sector has thrived during the global health crisis owing to a shift to online commerce and communication. Canadian tech companies have raised record sums this year from public and private investors, fuelling a record for foreign acquisitions.
While a handful of new issues, notably from Dye & Durham Corp, Nuvei Corp. and Magnet Forensics Inc., have more than doubled their IPO prices, eight of the 19 tech companies that have raised $50-million or more in their TSX IPOs since July, 2020, closed Wednesday below their issue prices. A recent Globe and Mail report found the average return for Canadian tech IPOs in the past year was negative 2.4 per cent, based on when each started trading, well below the corresponding stock market return.
“I think more of these technology IPOs are being priced for perfection, meaning you need to assume that very robust scenarios will unfold to justify current prices, let alone for the investor to make money,” said Jeff Mo, portfolio manager with Calgary-based Mawer Investment Management, which has bought into several of the 19 Canadian technology companies that have gone public since early July, 2020.
Stephen Takacsy, CEO and chief investment officer with Montreal’s Lester Asset Management, said he wasn’t concerned D2L’s stock price dipped after he bought into the IPO. “The company has been around a long time, they are leaders in the field and have a sticky blue chip client base” of educational institutions and corporations. He called the stock’s first day performance “irrelevant. You have to take a longer-term view.” After an initial trading period, “I think it’s going to get cleaned up pretty quickly and it will trade up.”
That belief is based on D2L continuing to deliver 20-per-cent-plus revenue growth, he added. D2L used to be one of Canada’s fastest growing startups. But its revenue growth heading into the pandemic had dipped into the single digits as it transformed its business to fully selling its software through online subscriptions, which typically weighs on results of software companies that make that shift. “When you pivot to a pure cloud model, that’s not easy for any company, and it took our growth down,” Mr. Baker said.
D2L’s operating earning margins are also in the low single digits. But its annual recurring revenue of $144-million in the 12 months ended July 31 was 23 per cent higher year-over-year. D2L, during its IPO roadshow, pointed to an increasing “win rate” among prospective clients, an expanding pipeline of potential business and the fact it grew revenues from existing customers by 7 per cent in its last fiscal year.
D2L has a different profile than its two key rivals, Instructure Holdings Inc. and PowerSchool Holdings Inc., which are forecasting lower revenue growth but much higher operating margins than D2L has been delivering. While Mr. Baker declined to offer forecasts he said the company is seeing accelerating growth and that while his competitors are more focused on increasing earnings rather than sales, “that’s not for us today. We want to become the market leader in this space and see this as an opportunity to pull away from the competition.”
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