Movers and SHAKERS
(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the "Balanced" section)
The Initial Public Offerings of privately held unicorn tech companies with valuations over $1 billion from the last decade are going to be available to markets in 2019. Big name tech companies such as ride-hailing companies Uber and Lyft, hospitality service Airbnb, and cloud-based messaging service Slack will, or already are, trading publicly. Last April, the social media site Pinterest was welcomed to the markets. The IPO rush of tech unicorns to market has shown a battle between the listing venues, New York Stock Exchange and NASDAQ, for an important segment of the U.S. economy.
Economic Strength: So far in 2019, multiple IPOs have shown promise due to an economic hot streak and the stock market going up by around 11% in that period of time. The IPO rush is widely regarded as a positive for the U.S. economy and stock markets. The current strengthened economy will lead management and boards to IPOs, with as many as 150 firms being listed. Tierney Remick, vice chairman of Korn Ferry’s Board and CEO Services practice, stated, “When there’s momentum behind IPOs, there’s no question that will impact people’s timing to go forward. It can be kind of a herd mentality.” Analysts have shown that companies and boards appear to be pursuing the route for IPOs.
IPO Exchanges: IPOs provide a multitude of marketing opportunities and economic incentives for exchanges. The closing auctions for trading must be at the company’s primary listing venue, in addition to membership and trading fees. Index-based investing and exchange traded funds have rapidly grown leaving trading in shares to gravitate towards the end portion of the day. Nasdaq has been the long standing go to for emerging tech market companies and maintains a substantial portion of the listings. The NYSE added tech companies such as Snapchat and Spotify in order to revamp its listings, recently gaining Uber as well.
Company Profitability: In April, the bond trading company, TradeWeb, debuted on the Nasdaq at $27 a share and is trading at close to $40 now. In 2018, TradeWeb, an already profitable company, reported net income of $160 million and $684 generated revenue. Investors may be focused on company performance and profitability during a company’s IPO. Lyft’s strong IPO is a sign of market confidence for big name tech companies looking to list and grow, even if they have been previously unprofitable. Multiple unprofitable billion-dollar valuation tech companies will have IPOs in 2019 with plenty of investor interest.
Underwhelming Pricing: Throughout the last year around half of the initial public offerings for companies ended with stock prices trading under offering price. Tech companies have lost key executives before initial public offerings causing them to take a hit. The ride-hailing company, Lyft, debuted on the market at $72 a share on March 28. The price valued the company at near $24 billion, raising $2.34 billion in new capital, even though the company had shown losses. On the first day trading on the Nasdaq, Lyft shares closed at $78. Lyft shares were oversubscribed by up to 20 times. In 2018, Lyft had a 103% year-on-year growth in revenue and a $911 million loss, up from 32% in 2017. In April, Lyft’s shares traded at around $60, showing a decline initial optimism due to the company’s future profitability of the company.
Previous IPOs: The difficulties Lyft had during its initial public offering negatively impacted the market. In April, the social media company, Pinterest, started trading and was expected to price around $22, which was the price sold to private investors. Due to Lyft’s underwhelming performance in market, Pinterest reported in its company SEC filing, pricing at a range from $15 to $17 a share for its IPO. The IPO for Pinterest ultimately priced at $19 a share, which was lower than hoped but higher than the range indicated by the company.
Importance of Management: Boards and directors can underestimate the process needed to effectively and efficiently transition to a publicly traded company. Boards need to add independent directors, to list stock exchanges, and who can help expand into new markets without any volatility or liability. IPO timing is also a crucial aspect with firms not reaching expected valuations instilling fear in both investors and customers. Karen Dempsey, a partner at the law firm Orrick, stated, “Directors know they have to manage risk, but they typically have limited infrastructure and resources to assess what they should be doing.” A company needs talented management and directors who can provide critical support and information while limiting risk to the firm.
Uncertainty: The ride-hailing company, Uber, has had initial valuations of up to $120 billion, which would list at one of the world’s largest companies by market cap. In April 2018, Uber’s SEC IPO filing reported a $1.8 billion net loss on gross bookings of $50 billion. Uber’s large losses and continuously slowing growth throughout the year leads investors to wonder if it can maintain its initial valuation during its IPO. Other loss-making tech unicorns such Palantir and Airbnb are also brought into question as they are private companies without any reported statements on finances. Both companies plan to have IPOs in 2019 even though they are reportedly unprofitable, possibly making investors wary of their profitability and lowering anticipated valuations. Lyft’s post IPO performance was relatively to similar to the performance of other newly listed companies, performing well on its first day of trading and underperforming over the next couple years by around 20%.
https://www.ft.com/content/c47fcf64-4fb1-11e9-9c76-bf4a0ce37d49, Philip Stafford MARCH 26, 2019
https://www.kornferry.com/institute/ipos-whats-the-rush, May 21, 2019
https://seekingalpha.com/article/4264936-ipo-rush-promise-peril, Daniel Shvartsman May 18, 2019