Wix, Fiverr and Lemonade Crash: Israeli Technology Bubble Bursts on Wall Street

Many Israeli tech companies are trading at less than half of the peak values they hit in the midst of the pandemic

Omri Zerachovitz
Omri Zerachovitz
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Wix's IPO in New York.
Wix's IPO in New York.Credit: Nasdaq OMX
Omri Zerachovitz
Omri Zerachovitz

Some of Israel’s leading high-tech companies are down more than 50% from their peak on Wall Street earlier this year, as investors turn bearish on the tech stocks they embraced when the pandemic began. Wix, Fiverr and Lemonade are all currently trading at less than half their peak value.

This may stem from disillusionment that followed the optimism regarding technology companies that prevailed when the pandemic was still new. Another possible reason is that investors believe they previously overestimated the extent to which the coronavirus would contribute to these companies’ bottom lines.

In February, Wix was trading at more than $20 billion, making it Israel’s company with the largest market cap. Demand for the company’s products was constantly increasing.

“Small businesses, which had no or only partial online presence beforehand, went from ‘its nice to have a corporate website’ to ‘it’s crucial to have one,’’’ Wix president Nir Zohar said in the past. But the market sentiment has changed, and the company’s stock is now trading at 57% under its peak, and is close to its pre-pandemic valuation.

Wix is one of many companies that benefited from the accelerated digitization process spurred by the pandemic. Investors assumed that these companies would continue to grow after the pandemic passed, too. The best such example among international companies is video meeting company Zoom. Even workplaces that have resumed their prepandemic in-office activity still find remote meetings useful.

Similar processes took place at other tech companies – more freelancers are now offering their services on Fiverr, more consumers are getting online insurance via Lemonade, and cybersecurity companies are protecting their customers from more hacking attempts.

Lemonade's IPO in New York.Credit: NYSE

Nasdaq may be very close to its peak at the moment, but some of those technology shares are far from theirs. The pandemic sent the prices of publicly traded tech companies soaring, and those that went public during the pandemic did so at incredibly high valuations compared to what they would have received prior. At its peak, Wix was trading at an earnings multiplier of 20 times its earnings from the previous year. Now its is trading at a price-to-earnings ratio of 7.

The assumptions proved false

When the coronavirus was still new and the return to routine seemed distant, investors gave the companies a significant premium, assuming they’d continue to grow their user and client bases.

“In some cases the market caps were very high. When the pace of growth slows down, then the multipliers decrease, too,” says Sergei Vashchonok, a senior analyst at Oppenheimer. “When the growth rate slowed down, the investors became less forgiving about losses.”

Another assumption was that those companies would leverage their growing client bases to increase revenue. For example, investors hoped Zoom would offer users additional products and thus charge more, or turn more users into paying customers.

But it was difficult, if not impossible, to assess how quickly the companies’ revenues would grow, or what their customer lifetime value would be. One such example is Talkspace, which connects users to a network of qualified psychologists with whom they can communicate via text messages, voice messages and video. The company grew quickly during the pandemic, but couldn’t calculate how many of its new customers were there due to the pandemic, and how many were there due to its marketing. This year Talkspace found out it wasn’t so easy to bring in new users.

Another factor that affected the high valuations was the large number of initial public offerings conducted via SPACs (special purpose acquisition companies). Under this process, the companies went public by being bought out by a publicly-traded shell company that is listed on the stock exchange exclusively for the purpose of acquiring the private company, thus enabling the private company to skirt the traditional IPO process. Since many companies went public this way, the competition to buy into privately held companies increased, as did the valuations the companies achieved.

But now the market sentiment is chilling toward these SPAC mergers, and many are trading below their merger prices, some of them significantly lower. Some analysts believe disappointment with SPAC companies has translated into negative sentiment toward other tech companies as well.

Fiverr's Wall Street IPO.Credit: Fiverr

It’s not all about technology

The investors may have sobered up about how much lemonade they could make from the coronavirus lemon, but this isn’t the only reason why valuations were so high — and in some cases, still are.

Another significant reason is near-zero interest rates and the U.S. Federal Reserve Bank’s expansionary monetary policy, commonly known as “printing money.” The Fed increased the supply of U.S. dollars by paying financial institutions cash for their bonds, with the goal being that the cash reach the market. The money increased demand for investments, inflating the prices of both publicly and privately held companies.

But at the beginning of the month the Fed said it was cutting back on its monetary expansion due to rising inflation in the United States and amid forecasts that interest rates would be increased starting next year.

A banner ad for Zoom on Nasdaq's New York office.Credit: Mark Lennihan / AP

The technology companies were subject to two strong influences – growing demand for their products and cheap money in the markets. Optimists thought the first influence was stronger, while pessimists believed markets were soaring due to the low interest rates. One thing is clear: The bank’s announcement was enough to cool the markets and drive money away from technology shares.

Another factor was the coronavirus’s impact on everyday life. At the beginning of the crisis, considerable amounts of money were diverted from shares of companies hurt by the pandemic, including those in fields such as tourism, to shares of other companies, such as technology companies. Since many countries have resumed normal life to some extent or another, some of the stocks that took a hit due to the pandemic are now recovering.

“The COVID-19 crisis was good for the technology sector because nothing else was functioning. Now that we’re returning to relative normalcy, technology is no longer the only sector to invest in. Take Zoom, for example. Since they found a medicine to treat COVID-19, its share price has only been decreasing,” says Vashchonok.

While some technology shares are down tens of percentage points, others are only 20% to 25% under their peak, and are still trading at high earnings multipliers. Monday, for example, is trading at a price-to-earnings ratio of nearly 50, while cyberdefense company SentinelOne is trading at a P/E ratio of 80. Both went public about six months ago and are still considered favorites among investors. As long as they maintain their fast growth rate – Monday is expected to nearly double its revenue this year – investors will remain optimistic about them.

“Monday is the kind of stock that investors think is still going strong, because the company is still starting out. Nobody knows if Monday is the next Google or a nice service with limited potential,” says Vashchonok. “If it reaches revenue of $1 billion and then its growth rate slows to 20 percent, its multipliers will drop accordingly, because investors might think the company has exhausted its growth potential. At the moment this is not the case.”

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