The surprise postponement of the WeWork IPO has underscored how confidence is eroding in the market both for companies looking to raise capital and investors.
A more discerning market for initial public offerings continued to punish Peloton Interactive Inc on Friday, a day after it began trading. Shares of the fitness startup closed down 2 per cent at USD 25.24 and are now off 13 per cent from their IPO price. The company is now trading 15 per cent below its Wednesday IPO price.
Before trading began on Friday, five of this year’s eight deals of USD 1 billion or more were trading below their IPO price, according to research firm Dealogic. On a broader scale, only about 27 per cent of the 112 deals of USD 100 million or more were trading below their IPO price.
Venture capital firms and other backers of many of these high profile “unicorns” – companies valued at USD 1 billion or more in the private market – had a higher tolerance for the path to profitability, but eventually they wanted to monetize their stakes.
Investors get more selective
In the past, public market investors have typically expected companies to become profitable within 18 months or so of an IPO. This timeline has been relaxed with money managers eager to add businesses with fast-growing revenue to their portfolios.
Recent deals, however, suggest an uncertain economic outlook is pushing investors to be more selective about which loss-making companies they are willing to back.
Peloton reported rapid top-line growth of 110 per cent during the fiscal year that ended June 30. But the company also showed negative operating leverage, with operating expenses surging 147 per cent over the prior year.
Loss-making teeth-alignment company SmileDirectClub this month became the first U.S. IPO in three years to price above its target range and close down on its first trading day, according to research firm Renaissance Capital.
Beyond meat, Pinterest surge
SmileDirectClub is the worst performer among USD 1 billion-plus IPO deals, with its stock down 43 per cent since its debut earlier this month, according to Dealogic.
The best performer in that group is social media company Pinterest Inc , whose shares are up 39 per cent since their April debut. Revenue at Pinterest surged 58 per cent to USD 463.2 million in the first half of 2019. Net cash used in operations during that period narrowed to USD 16 million from a year-ago USD 29 million, according to Pinterest’s financial statements.
Shares of Beyond Meat Inc , which came to market in May in a small USD 277 million deal, have surged more than 500 per cent since the IPO. The company’s operating expenses more than doubled during the first half of the year, but that was outpaced by top-line growth that more than tripled.
Average IPO return drops
Meanwhile, the average IPO return in 2019 was now about 6 per cent at the end of trading Friday, down from more than 30 per cent at the end of June and more than 18 per cent about two weeks ago.
In the United States, much of the attention in the third quarter has focused on a deal that failed to come to fruition – the planned IPO of WeWork parent We Company.
The company had aimed to launch its IPO earlier in September, then postponed plans to list until later in 2019, before replacing its chief executive officer and saying it was reviewing its timetable to go public.
Endeavor Group Holdings , an entertainment and talent agency company backed by Hollywood power broker Ari Emanuel with a track record of losses, made a last-minute decision to abandon its IPO due to the tough market conditions.
Home rental giant Airbnb has said it plans to list its shares in 2020 but provided no details and is widely expected to do a direct listing to go public. In a direct listing no new shares are created and investors can sell their stakes while saving millions of dollars in underwriting fees.
This month the company said it raked in more than USD 1 billion in second-quarter revenue. It has not given details on whether it was profitable.
Taking a lesson from the struggles earlier in 2019 of ride-hailing companies Uber Technologies and Lyft Inc , which have no stated timetable for becoming profitable, investors have started to push back on companies with a history of steep losses.
“It will be a dialogue among bankers and boards and senior management teams where they say, ‘these were isolated and not comparable,’ or say ‘we have a sentiment shift and we need to be more conservative and use a different strategy,'” said David Ethridge, U.S. IPO services leader at audit firm PwC.
WeWork junk bond dives
While WeWork’s stock never made it to the market, it did float a USD 669 million junk bond in May 2018, and that plunged to near a record-low price on Friday.
The 7.875 per cent note due in May 2025 fell 4 cents on the dollar to 87 cents, just 1.5 cents from its record low of 85.5 cents in early January.
Its yield, which moves in the opposite direction, shot above 11 per cent. The spread of its yield over U.S. Treasury debt, a measure of the added compensation demanded by investors to hold the risky paper relative to safer government securities, mushroomed to nearly 9.50 percentage points, the widest ever.
A month ago, the bond had rallied to a record high price of 105 on We Co’s preparations for the IPO. As the deal fell apart in recent weeks, the bond has slid on concerns about the company’s lack of access to fresh funding.
