Zendesk IPO: Show of Strength or Sign of Weakness?

Zendesk’s recent IPO was a great success, closing the trading day up nearly 50% since hitting the market, but tech investors need to know the rest of the story.

May 20, 2014 at 4:32PM

In this video, Motley Fool analyst Lyons George takes a look at Zendesk's (NYSE:ZEN) recent initial public offering.

In what appears to be a straightforward success, the tech company's shares finished the day of its IPO at $13.43 -- great news for those who got in early. But there's more to the story than meets the eye, as Lyons explains that some of that first-day public market demand may not have come from the "public" at all.

A full transcript follows the video. 

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Lyons George: Hi, I'm Lyons George with The Motley Fool, here today to talk about one of the biggest tech IPOs of the week, Zendesk.

The cloud-based helpdesk-on-demand company came out swinging this past Thursday, raising $100 million in its IPO, and closing out the trading day with shares at $13.43, a full 49% above where they opened. You can bet people who got in early are happy about that!

Also, that's good news for both the company and its investors, especially considering the stage Zendesk came out to -- a month that has seen the tech sector hit especially hard, with giants like Amazon, Facebook, and Yahoo! all booking [at least] 15% drops from their 52-week highs.

With that success story in the can, does that mean smooth sailing for tech investors from here on out? Not necessarily.

If you dig a little bit deeper, there was an article published in The Wall Street Journal that shows that a sizable chunk of the first-day demand that made Zendesk's venture capital investors so happy may well have come from Zendesk's venture capital investors.

In a document disclosed the morning of the IPO, the company revealed that a group of its early backers, including a trio of venture capital companies, indicated an interest in buying up to $25 million, or one-quarter of the offering, on the day of the IPO.

In other words, it's very possible that some of the demand behind this successful out-of-the-gate performance was, in a sense, artificial.

Now, it's worth noting that while a move like this wouldn't be unprecedented, it's also extremely uncommon in tech IPOs. Generally, VCs have more of a mind toward making an exit, rather than doubling down when one of their portfolio companies makes its debut.

But with the market punishing even the biggest of players recently, it looks like Zendesk and its backers are more than a bit worried about a broader tech slowdown.

Now, if you're worried about a slowdown, too, or think the market's going to keep going up or just want to stay up to date on what's happening in tech, be sure to go to Fool.com for all your day-to-day tech coverage. I'm Lyons George with The Motley Fool. Thanks for watching, and Fool on!

Lyons George has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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