Amplitude (AMPL -5.60%) became the latest high-flying cloud stock to hit the public markets on Tuesday, debuting with a market cap exceeding $5 billion.
But the digital optimization specialist took an unconventional route to the Nasdaq, going public through a direct listing instead of a conventional IPO. Unlike an IPO, which offers a chunk of new shares to a select group of investors (generally banks and other institutional investors with access to these start-ups), a direct listing does not offer new shares to investors. It gives current shareholders a means to sell their shares on the public market, and in the process, any investor has the opportunity to buy them.
Amplitude employees celebrate its IPO. Image source: Amplitude.
A direct listing is also different from an IPO because it doesn't dilute existing shareholders' stake in the company, and the market determines the price of the stock. In a traditional IPO, the underwriter generally sets the offering price.
With the move, Amplitude joins a growing list of tech companies opting for a direct listing instead of a traditional IPO. Among other noteworthy stocks to go public through a direct listing recently are Coinbase Global, Roblox, Asana, and Palantir Technologies.
Why go direct
In an interview with The Motley Fool, CEO Spenser Skates explained his decision to go public via direct listing rather than a traditional IPO:
You have to do a direct listing as a CEO. If you aren't, you're being a poor fiduciary to your current shareholders. Last year, on average, traditional IPOs underpriced the stock by 50% so you're basically selling a dollar for 50 cents. I don't understand why any CEO or any company would do that when direct listing is available as an option. I was talking to one public-company CEO who called traditional IPOs the largest arbitrage opportunities in all of finance, the entire financial world. It's crazy. Why would I as a CEO want to be on the other side of that? So I think I have an obligation to the company and to the shareholders to get the best result, and that is what the direct listing is all about.
Skates makes a good point. There's no shortage of IPOs that have skyrocketed over the past year, and that mispricing essentially acts as a wealth transfer from the company to IPO buyers, who get an undervalued stock that often doubles in value immediately. Snowflake stock, for example, jumped 112% in its debut, meaning the company left $3.8 billion on the table. Airbnb shares soared 115% in its opening day, meaning it could have raised billions of dollars more, and DoorDash also found itself in a similar position when its stock rallied 86% on its first day.
Given that track record, it makes sense to go the direct-listing route instead of a traditional IPO, as Skates argued, if your company doesn't need to raise more cash. Amplitude finished its recent quarter with more than $300 million in cash, so it has plenty of cash to run the business at its current levels; it had a free cash flow loss of $16 million last year, which improved to a loss of just $5 million in the first half of this year.
For investors, Skates' thoughts on the direct listing show that he is very much aligned with his existing shareholder base, and while the company will use share-based compensation to its advantage, much like most tech companies do, and might make strategic acquisitions using its stock, investors should rest assured that Skates won't dilute their holdings without careful consideration.
