This year is setting up to be a blockbuster for IPOs particularly in the tech space. Over the past several weeks large companies such as Slack and Uber have voiced their intention to IPO. Others are even further along in the process. Lyft filed an S-1 on March 1 with details about its finances and even a ticker picked out (LYFT). In total, companies with about $250 billion of market cap are planning to IPO this year. With that, here are five things to keep in mind related to the IPO market.
1) IPO performance is an important risk-on, risk-off indicator for the stocks
The IPO market tells investors a lot about the risk environment based on the notional amount sold through IPOs, and how the shares trade after. A robust IPO market signals high liquidity and enthusiastic demand to invest in risky new shares. A muted IPO market suggests risk appetite is suppressed.
Over the past 3 years, IPO shares have generally outperformed the S&P 500. In 2006 – mid 2018, the amount of IPOs steadily increased and new shares outperformed the market. To track the performance post the offering, the IPO ETF is a good barometer.
The ETF tracks the rules based Renaissance IPO Index, which adds sizeable new companies on a fast entry basis and the rest upon scheduled quarterly reviews. Companies that have been public for two years are removed at the next quarterly review.
In July 2018, the IPO ETF peaked vs. the market and started underperforming. This was a harbinger of the market sell-off which started in October. The IPO ETF bottomed relative to the market at the end of December, and has rallied since.
Long/short performance of IPO etf vs. SPY
2) Since 2016, performance of tech companies after IPO is a mixed bag with Software leading
Focusing on the tech sector, the largest IPOs over the past 3 years are a mixed bag. Some companies such as Docusign (+91.6% since IPO), Ceridian (+116%) and Pluralsight (+120%) have done very well. All three are in the software space. Others like GreenSky (-51%), Sogou (-53%) and Trivago (-52%) have disappointed investors since their IPO. The biggest IPO in recent memory, Snap is down 42% since its debut 2 years ago.
20 largest tech IPOs over the past 3 years
Smaller IPOs particularly in the SAAS sector have fared much better. For example, Okta (OKTA) went public on April 6, 2017 at $17 per share. Even buying the stock after its first day pop has produced a 230% return. However, not all SAAS IPOs have done well as Dropbox (DBX) is down 22% since its first day of trading
Performance of select software IPOs
3) IPO offerings have slowed since 2014 before an expected pickup in 2019
The notional value of US IPOs was about $20B and declined through the end of 2015 as investors waited for the US election for clarity. After the presidential election in 4Q2016, the amount increased steadily to $15b per quarter in the middle of 2018. Since then, the offering amount per quarter has declined back to $5b per quarter.
Notional Dollars of US IPOs by quarter
4) The rush to IPO is probably related to the presidential election in 2020 and recent economic weakness
From a company’s perspective, deciding whether to IPO depends on many variables. However, the recent rush to IPO in 2019 is probably related to 2 macro factors. First, the presidential election in 2020 will likely cause uncertainty similar to 2016 when the IPO market took a pause. Second, recent economic slowdown has increased the odds of a recession in late 2019 or 2020. Private companies want to get ahead of any recession when the IPO market will undoubtedly cool.
5) Large tech IPOs in the pipeline have a combined private market value of $250 billion
The details of upcoming IPOs have only recently started to trickle in and most companies have not released any detailed filings about size or valuation. The combined private market value of the largest tech IPOs is $250b. Assuming that 20% of the market cap will be floated in an IPO suggests about $50b of notional offerings in the next 12 months in the tech sector.
Large Tech unicorns expected to IPO in the next year
|Company||Valuation||Expected IPO Date||Industry|
|Palantir||$36-41b||2H19 – 1H20||Big data|
|Rackspace||$10b||2019||Cloud / Hosting|
|Robinhood||$5.6b||2019||Stock & crypto trading|
The implications for the stock market depends on several factors. All else equal, IPOs are negative for the overall market because it increases the supply of overall equity. Investors need to sell other stocks in order to buy an IPO (unless there’s idle cash). However if IPOs are well received by investors and trade strongly after, this would indicate a bullish market with robust liquidity. This was the type of market in the late 90’s.
Below is the company summary of the largest tech unicorns and the financial details known today.
Uber & Lyft – Lyft’s IPO roadshow is planned for mid-March 2019. In comparisons between Lyft and ride-sharing competitor Uber, some have called Lyft “cheap”, citing Lyft’s valuation is rumored to be <$25bn, about ⅕ of Uber’s rumored $120bn valuation. Uber is much bigger than Lyft in terms of total revenue and rides. However, Lyft is reportedly growing much more quickly than Uber, and the company has largely avoided negative press (unlike Uber). As for market share breakdown, in May 2018, Lyft revealed market share figures for the first time, claiming 35% of the US ride-share market. In some markets across the country, Lyft claims to have the largest share. Overall Lyft has gained on Uber’s share by about 40% as of February 2019. The two ride-share giants differ not only in terms of size and reputation, but also in terms of funding (see chart below). Of the 2, only Uber has used debt financing or private equity money.
Airbnb – As of Jan 2019, the online housing marketplace posted its 2nd consecutive year of positive EBITDA. Specific metrics released by the company show robust growth. The company expected 500m guests by end of 1Q19, up +100m from figures released Aug 2018. In 3Q18, the company told CNBC that it had passed $1 billion in quarterly revenue. Recently Airbnb expanded into the hotel space with its acquisition of Hotels Tonight. The company was valued at over $30 billion in financing rounds in 2016 and 2017.
Palantir – The SAAS company, founded by Peter Thiel in 2003, has been transitioning its revenue from government contracts to big businesses since 2017 in order to increase profitability in preparation for its IPO. The company has been historically secretive under the leadership of CEO John Karp, due to the nature of its work with government agencies – Karp recently said “I find out about a stopped terror attack in Europe about once a week”. He clarified that these included both pro- and anti-Muslim terror and cited the high-stakes nature of Palantir’s work as motivation. The company reported $880mm in revenue for 2018, up +280mm Y/Y. Recent comparable big data / analytics IPOs have traded in the 7-8x 1-year fwd revenues range.
Pinterest – Pinterest is one of the last remaining still-private social media giants and has raised about $1.5b of funding in the private market. The company filed for IPO in late Feb and aims for a valuation around $12b. Its revenue stream is generated solely through advertising and is estimated at $1b.
Postmates – The company filed confidentially for IPO on Feb 7, which it announced in a post on its blog. Postmates joins the highly competitive food delivery space. Public market players include recent delivery-specific IPOs such as Blue Apron (APRN) – IPO in 2017, Grubhub (GRUB) – IPO in 2014. As well as the recent entry of larger public companies into the food delivery space – Walmart (WMT), Weight Watchers (WTW), and Amazon (AMZN). Competition in the private markets includes UberEats, Plated, and Freshdirect.
The pieces are in motion for some of the largest private tech companies to go public this year. Even investors that don’t expect to buy the IPOs need to follow their progress. The ability of the market to digest this large supply of new companies will be a tell tale sign if stocks can continue to climb higher.
Special thanks to Evey Donatelli for helping to research this blog post