10 BARRON’S September 30, 2019
Thebadnews:Anumberofhigh-profiledebutshavebeendisappointing.The
goodnews: Investorshavebecomemorediscriminating. ByEricJ.Savitz
TheEasyRideIsOver
FortheIPOMarket
ALL OF A SUDDEN, THE INITIAL PUBLIC OFFERING
market is behaving rationally.
After a remarkable first half that saw newly
public companies raise capital at a historic rate,
there are signs everywhere that a correction has
set in. While there was no 2000-style bubble in the
first half, there clearly were signs of excess. Jay
Ritter, a University of Florida finance professor
who tracks the IPO market, notes that the average
new issue this year has traded up 25% on its list-
ing day, the highest first-day average return since
- But the trend has started to shift: The Re-
naissance IPO exchange-traded fund (ticker: IPO),
which invests only in new issues, is down 15%
since late July, after rallying sharply in the year’s
first half.
Amid the headlines about IPO disappointments,
there is a broader takeaway: Investors have be-
come more discriminating, and that’s good for ev-
eryone. “Everything has changed, and nothing has
changed,” says Lise Buyer, founder of Class V
Group, an IPO consulting firm. “Lately, there’s
been lots of noise and fireworks, and hullabaloo
about direct listings. But the No. 1 thing is that
fundamentals have not changed. Institutional in-
vestors are pretty darned smart when looking at
IPOs, regardless of structure and buzz. Investors
will analyze the company, the prospects for the fu-
ture, and the price at which they’re being offered
the chance to invest. That has not changed as long
as I’ve been in the business.”
IPO tracker IPOScoop.com counts 114 U.S. IPO
pricings in 2019—63 have had positive returns.
The trouble for money-losing customer-facing
companies like Uber Technologies (ticker:
UBER), Lyft (LYFT), and Peloton Interactive
(PTON) shouldn’t be confused with the strong in-
vestor interest in cloud-based enterprise software
companies, which sport hypergrowth and subscrip-
tion-based revenue models that make their results
highly predictable.
These companies have low-capital requirements
that offer a clear path to profits. Multiple compa-
nies that fit this description have come public in
- In many cases, their stocks have sold off.
Their appeal remains nonetheless, and you can be
sure there will be more cloud-based software IPOs
to come. Among the class of 2019, Zoom Video
Communications (ZM), CrowdStrike Holdings
(CRWD), Fastly (FSLY), Medallia (MDLA),
Cloudflare (NET), PagerDuty (PD), and Datadog
(DDOG) are all up at least 15% since their IPOs.
Yet the market has turned a cold shoulder to a
collection of flawed businesses that feature capital-
intensive models, where competition is fierce, cor-
porate governance is weak, losses are astronomi-
cal, and debt loads are high. The troubles in this
group started earlier this year with Lyft and Uber,
which are both well below their IPO prices. The
two companies fight head-to-head in an intensely
competitive market, with little chance of near-term
profitability and growing scrutiny from regulators,
In recent weeks, new troubles have emerged. It
started with WeWork’s parent We Co., which
pulled its IPO two weeks ago in the face of intense
criticism about the real-estate rental company’s
corporate governance practices, along with serious
investor concerns about its business model and val-
uation. WeWork is now revamping its approach to
corporate governance and co-founder Adam Neu-
mann stepped down as chief executive. They’re im-
portant changes, but a WeWork IPO in 2019 now
seems highly unlikely.
Buyer says her IPO firm remains as busy as
ever, although she notes that there are some clear
lessons in the WeWork situation in particular. “We-
Work will have an impact on companies assuming
losses can be unbounded or that governance does
not matter,” she says. “Companies need a credible
path to profitability. WeWork is a warning flag, and
frankly so is Uber, signaling to companies that the
business model matters. Public investors are not go-
ing to just stand there with open arms. Investors
are being selective and discriminating.”
One good example of the discriminating behav-
ior is the IPO of SmileDirectClub (SDC), which
sells orthodontic devices over the web—the Warby
Parker of braces. The company went public earlier
this month at $23 a share—after boosting its IPO
price—and has since dropped more than 40%.
This past Thursday, there were two more heavy
blows. The first came from Peloton, which sells
pricey internet-connected stationary bikes and
subscriptions to associated online classes. Peloton
priced a much-anticipated IPO at $29 a share, at
the top of the expected range, but it opened trad-
ing on Thursday at $27, and fell from there. By
Friday’s close, the stock was barely above $25. The
deal was hampered by skepticism about the com-
pany’s substantial losses, its potential market size,
and the faddish nature of fitness products.
Later on Thursday, Hollywood superagent Ari
Emanuel’s Endeavor Group yanked a planned of-
fering just hours after reducing the expected price
for the deal. Endeavor is a complicated entertain-
ment company that includes a large talent agency,
film and TV production, Miss Universe, and half of
UFC, the leading mixed martial arts circuit. En-
deavor is growing nicely, but it’s also losing money
and it’s heavily leveraged. Had the IPO gone
through, Endeavor would have had an enterprise
value of $10.2 billion—$6.4 billion in equity, and
$3.8 billion in net debt.
Finally, there are the IPOs that are working,
some spectacularly well. BeyondMeat (BYND) re-
mains by far the year’s best performing new issue,
The Selloff
Renaissance IPO ETF
YTD
Source: FactSet