How do you measure panic? How do you know when it subsides? And how do you predict when the stage is set for a bona fide IPO rebound?
One important factor to look at is volatility. Turbulent stock markets aren’t hospitable to IPOs. With this in mind, we decided to look at the volatility of the software industry over a long period.
The visualization shows the daily returns of every software stock in a large sample for the last 13 years. The reference lines show standard deviation: the inner lines for each year show the 1st standard deviation (covering about 68% of the returns), and the lines farther out show the 2nd standard deviation (covering about 95% of the returns). Standard deviation measures how closely the returns for that year cluster to the mean return. This is a measure of overall industry volatility: the closer the lines are to each other, the lower the volatility.
Reading the Software Industry Cardiogram
The changes from year to year tell a great story:
- Wild Times. The story begins with the infamous technology industry volatility of 1997 – 1999.
- Implosion. Panic levels increase dramatically in 2000-2001 with the dot.com implosion. (Amazingly, in 2000, ~16% of daily returns in the industry were less than -7.13%.)
- Recovery. The implosion was followed by six consecutive years of steady recovery. Panic levels fall incrementally each year as trust in software stocks was restored; notice the lines converging 2000-2006.
- Boom. 2007 was a great year for software IPOs, indeed the best year for IPOs since 2000 (see the Software IPO Tracker). Volatility was low and the IPO window opened wide.
- Implosion. This of course was followed by the great financial crisis of 2008-2009. Volatility regressed to 2002 levels virtually overnight. The IPO window closed completely.
Where Do We Stand Today?
Of course the interesting follow-on question is: How are we doing today?
This (interactive) visualization shows the daily returns for 2009 by quarter. Again, some observations:
- The Dot.Bomb Was Worse. The 2008-2009 financial crisis didn’t produce nearly the same levels of volatility for software stocks as did the dot.com implosion.
- Great Improvement. Volatility has been declining significantly each quarter this year. Things are materially improving.
- Not There Yet. If we use 2007 as a guide, industry volatility needs to fall significantly further before the IPO window will open wide. As I write this, the IPO window is beginning to open for stocks as a whole but not yet for the technology sector.
Despite fears that the IPO window may take as long to really open as it did in 2000 (7 years), we may be in for a surprise. The technology industry was not the cause of the current crisis the way it was in 2000. And volatility in the industry suggests we are on a faster path to recovery.