It’s been a rough week in the IPO markets.
First came the dismissal of Adam Neumann, CEO of The We Company, as part of an effort to save the firm’s troubled IPO. Then came the debut of Peloton (PTON) , a maker of connected fitness equipment, in which the stock fell about 13% from its IPO price of $29 per share. Finally, Endeavor, the global entertainment group, pulled its IPO on Thursday after slashing the price of the offering and the number of shares.
It’s reasonable to conclude that the IPO market is looking a bit soft.
“The IPO market is getting gangster-ized by rationality,” said Eric Schiffer, CEO of investment firm the Patriarch Organization.
Serving as the backdrop to more recent IPO stumbles are a handful of high-profile debuts that have underperformed this year. Several former unicorn darlings are down substantially since their respective debuts, with Uber (UBER) off 21%, Lyft (LYFT) down 40% and Slack (WORK) 31% during their tenures as publicly traded companies. Even high-growth cloud stocks, such as Twilio, Shopify and Okta, have seen a significant selloff in recent days.
While each stock and business model has its unique risks, the unfriendly reception of recent IPOs, or would-be IPOs, boils down to a couple of key points: profitability and valuation.
WeWork, which fetched a $47 billion valuation by private investors earlier this year, slashed its valuation to as little as $15 billion as it tried to rescue its flailing IPO. And its largest outside investor, Softbank (SFTBY) , reportedly pushed for the dismissal of Neumann after investors balked at the We Company’s questionable oversight and governance.
“People don’t want to be conned; they don’t want to be the big sucker,” Schiffer added. “These companies have made a lot of people look foolish, including quote-unquote ‘smart money’, and people have been slapped by reality.”
In particular, investors appear less willing to bet on money-losing “economies of scale” with uncertain profitability timelines.
In the case of Peloton, which is growing its membership and revenue base but losing hundreds of millions of dollars per year, investors must decide if they believe that Peloton’s products can change “long-standing patterns of consumer behavior,” said John Mullins, associate professor of management practice in entrepreneurship at London Business School. Namely, that workout regimes can be cyclical and faddish.
“Whether it can really turn into a sustainable business is the question,” Mullins said.
There’s a broader market shift at play, added Kathleen Smith, principal at Renaissance Capital (IPO) , provider of institutional research and IPO ETFs.
“I think there’s flight of capital away from what are considered risk assets and into safety,” Smith said. “The same thing is going on in the high-yield bond markets; the risky ones are being re-priced. So I think we’re looking at a bigger capital markets event here.”
Weak IPOs, falling valuations, an appetite for real profits — all signs that investors are crowding into less risky value names. What’s more, according to Smith, the IPO window may shut for a little while. Consequently, growth names who were counting on a major capital infusion may find themselves scaling back and cutting costs.
We could be headed into a more “Darwinian” IPO cycle, Smith added: “Only the strong survive, the most sustainable business models.”
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