On the surface, the US initial-public-offering market is sizzling.
Jam-packed with big deals and filled with splashy names once only the stuff of venture capitalists’ dreams, the IPO market is incredibly active this year.
It’s giving everyone from investment banks to foreign investors multi-million-dollar paydays, and the average investor a chance to own a piece of young companies trying to disrupt industries.
And the stakes are high. The 80 US-listed IPOs so far this year represent the heaviest volume since 2014, according to Dealogic data. They have contributed nearly 15% of the last decade’s total IPO volume, the firm’s analysis shows.
But under the hood, it’s a different story. The volatile market has absorbed flop after flop, wiping out investor wealth and setting a grim tone for IPOs coming down the pipeline.
The disappointing performances in some cases can be attributed to the very quality of companies hitting the market, due to their unclear paths to profitability and an uncertain macroeconomic backdrop, analysts and investment advisors told Markets Insider.
“We are seeing the end of a cycle,” Tom Forte, a senior research analyst at D.A. Davidson, told Markets Insider on Friday. “At the end of a cycle, companies that want to go public during the cycle rush to go public. And, selectively, we are seeing that there are some investors out there who are willing to stomach today’s losses for tomorrow’s gains.”
Quickly, a rundown on some of the IPO market’s noteworthy disappointments: Lyft’s first month of trading reflected the second-worst for a large US-listed IPO on record with a 20.5% decline, per Dealogic. Only Facebook’s 21% drop in 2012 was worse.
Lyft’s biggest rival, Uber, was a disaster in its own right, posting the largest first-day dollar loss of any domestic IPO going back to 1975. Its own pricing was reportedly influenced by Lyft’s poor stock-market showing following its own debut.
The pair of newly public ride-hailing companies would naturally trade in a volatile fashion during a period of heightened market volatility, said Erin Gibbs, a portfolio manager at S&P Investment Advisory Services.
“I’m more hesitant of the riskier IPO market as we face increasing uncertainty over our own economy,” Gibbs said in an email on Friday.
“I think investors tend to forget that the reason a company goes public is because it needs cash, whether to pay back private equity, pay debt or to grow, it needs capital. Companies don’t go public to make investors wealthier. So I feel we should always be wary around the hype of any IPO.”
Pinterest, meanwhile, surged in its April debut. Shares rose 30% during their first few weeks of trading before crashing after its first quarterly report was underwhelming.
To be fair, the market has also ushered in smashing successes this year.
Beyond Meat posted the best first-day performance of any US-listed IPO, by Dealogic’s count, surging 163%. That was also the only time since the dot-com era that an IPO had a first-day return greater than 100%, per UBS.
Zoom, what has been dubbed “the profitable tech unicorn,” has surged 38% since its April debut, and hit a record high Friday. And the Nasdaq-listed Luckin Coffee, a China-based Starbucks competitor, rose 47% in its first day of trading on Friday.
“We don’t think the IPO market is a total failure,” Doug Clinton, a managing partner at Loup Ventures, a Minneapolis- and New York-based venture capital firm that invests in frontier technology companies, said Friday in an email.
“Zoom has been a great success story. PagerDuty has also performed well. We’ll see how Slack does soon, but it seems like it will go public at a valuation higher than its last private financing.”
Others say there’s not much to glean from a few companies with an extremely limited trading history.
“The volatility of the markets at this time, and all of the short term trading, makes it difficult to predict short term moves, especially as it relates to issuers that have been trading for a short period of time like Pinterest, Uber, and Lyft,” Scott Coyle, the cofounder and CEO of ClickIPO, an app that tracks initial public offerings, said Friday in an email.
“Over the long term, all 3 companies will be priced by the markets based on their financial performance metrics,” he added.