"Unnecessary risk": The surprising recommendation for tech companies considering an IPO

For years, Israeli tech companies that grew to a significant size aimed for an IPO on Wall Street, and most did not view the Tel Aviv Stock Exchange as a relevant option. However, in recent years, several changes have occurred, and now the right path for these companies may be to first go public in Tel Aviv, and later try to reach Wall Street. At least that is the opinion of the investment bank Jefferies, which published a comprehensive review on the subject.

Jefferies has an interest in companies choosing to act as they recommend in the review, because it is one of the most active banks on the local exchange, where it has led as a foreign underwriter in initial and secondary global offerings (Tel Aviv Stock Exchange, Nayax, Max Stock, Next Vision).

However, the investment bank also provides data and reasons why, in their assessment, Israeli tech companies should start their public journey in Tel Aviv. One of the main reasons that keeps Israeli companies away from initial public offerings in the US, the bank claims, is the fact that in recent years the valuation and revenue volumes of companies issuing on Wall Street have grown, so that today very few companies in Israel fit this.

According to Jefferies data, until less than a decade ago (2017–2019), the median valuation of a tech IPO on Wall Street was $1.6 billion; in the peak years of offerings 2020–2021, the valuation rose to $3.6 billion, while today it is $5.5 billion.

Moreover: in 2017–2019, a tech company went public on Wall Street with revenues of $331 million, and today it is $811 million, with an EBITDA (earnings before interest, taxes, depreciation, and amortization) of more than $100 million.

"This is a very high bar," write Jefferies economists, noting that after the massive SpaceX offering, there are other huge offerings in the pipeline like OpenAI, Anthropic, and others, and in such an environment, smaller growth companies struggle to compete for attention.

"There is no doubt that the American market is deep, but it can also be unforgiving," they remind. "Of the 19 Israeli tech companies that went public in the US since 2020 and remained public, only 3 are trading today above the IPO price." Many of the others have lost more than half of their value.

The lesson, according to them, should be to reach the American market with sufficient scale. "An IPO that is too early in the US is an unnecessary risk. A successful global offering in Tel Aviv can provide a more stable entry into the public market and lay the foundations for a later listing in the US," they emphasize.

The Palo Alto precedent

On the other hand, Jefferies points to the changes that have taken place in Tel Aviv in recent years. For example, they mention the transition to trading on Monday–Friday, intended to align with global trading, which led to a 191% increase in trading volumes on Fridays compared to Sundays in the past, and an increase in foreign investor participation.

According to Jefferies, the average trading volume in Tel Aviv in May stood at $2.4 billion with a peak in foreign investor participation of 33%. They also mention the resilience of the local market and the fact that the leading indices in Tel Aviv showed excess returns over global indices despite the war.

Another matter mentioned there is, of course, the dual listing of the cyber giant Palo Alto, which was registered for trading in February this year — not because of capital raising needs, but according to them, out of strategic intent.

"Media reports and private conversations we have held with companies and investors indicate that there are a number of Israeli tech companies with valuations in the billions of dollars that are currently registered only in the US and are considering a dual listing," they add.

Jefferies dedicates a chapter in the review to answering arguments against taking tech companies public in Tel Aviv. According to them, the most common concern relates to liquidity in Tel Aviv compared to Wall Street, but they mention the recent growth in volumes and also note: "The relevant question is not where the highest theoretical liquidity exists, but where a company of a given size will be able to achieve institutional trading consistently in the 6–12 months after the offering." In their assessment, in many cases on Wall Street it is difficult to achieve this and the result is volatility, whereas in a global offering in Tel Aviv, a more stable trading environment can be created.

A second argument that arises is that an IPO in Tel Aviv signals to investors that the company cannot go public in the US. According to the bank, the fear is disconnected from reality, and international investors do not evaluate companies based on the exchange where they are traded.

Jefferies adds that "entering the American market from a position of scale, support from institutional investors, and a history of trading is completely different than entering at the starting point... The company arrives with a defined investor base, a reputation as a public company, and credibility among global analysts and investors."

In this context, they mention the successful move made by the fintech company Nayax, which first went public in Tel Aviv and then registered for trading in the US. "For many Israeli growth companies, the most effective path to the global market starts at home," they conclude.