The new IPO crop and the potential upcoming harvest

Market and retail investors impact

Michael Carlin, AIF®

2019 has been an exceptional year for releasing new IPOs. In fact, not only has 2019 brought us some of the most exciting private companies we have seen in years, but more companies are expected to join the publicly traded marketplace. Through the first three quarters of 2018, there were 1,793 IPOs that raised $45.7 billion, which is 46% more than 2017 and more than three times the amount raised in 2016, according to Fortune.1 This year looks to be one of the best the market has seen in many years!

Now, what does this mean for the stock market and you as an investor? Let’s take a minute to explore the broader view on the IPO marketplace from a historical context while figuring out if this is going to be a blockbuster year for IPOs and what this could mean for the market overall.

Company earnings

The first important note is the number of new companies coming to market that have no earnings. By no earnings, I mean that these companies make no money. You may ask yourself – is it common for a company that isn’t making money to file to become a stock on the publicly traded marketplace? Historically speaking, this has happened before, and is fairly common among growth companies that take their profits and reinvest them into making their company bigger and better faster. If you look back at 2017 and 2018, you will see in the chart below that 76% and 81% of companies that went public didn’t make money.

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We’ve seen this before with such an alarmingly high number of private companies that don’t make money going public. The last time numbers were this high was the dot-com bubble markets of 1999 and 2000 when 76% and 81% of the companies did not make money. Many would suggest that the market and economy are very different today than they were 20 years ago. We agree with that assertion. Twenty years ago, there was a lot of hype and hysteria around anything technology related. I remember when companies like Webvan and Pets.com exploded on the stock market even though they didn’t make money and frankly, the world wasn’t ready for their services yet. In the markets of the late 1990s, stock prices went up on feelings and rumors rather than on actual earnings. So, as much as the percentages appear to be similar, we are not necessarily worried about a repeat of the dot-com bubble.

Raising private capital

For quite some time, many of the most popular new companies to invest in did not make their way to the stock market. Startups like Uber, Lyft, Pinterest, Peloton and Zoom all sought to raise money from the private marketplace while avoiding the public atmosphere of the stock market. Institutions and investors lined up in droves to continue to provide these companies with fresh sources of new capital as they fought for growth. What binds a lot of these companies together is the fact that many of them truly reflect the evolution of our U.S. economy with ridesharing, home sharing and state of the art video conferencing. The question that they’ll have to face now is did all their growth happen privately, or is there some growth left for investors who buy these stocks on the open market?

Valuations

Many of these companies are coming out at massive valuations. As we mentioned earlier, Uber, at one time, was believed to be worth $120 billion. Over the past few months, that value has slipped down to somewhere between $70 – $90 billion. Investor excitement has certainly dampened with the release of Lyft stock, a competitor of Uber. In fact, as this article at the end of April 2019, Lyft stock has lost more than 20% of its value since going public, which helps explain why there is less excitement for Uber shares. It’s also difficult to assess how much these companies should be worth since many of them have no immediate plans or insight into when they’re going to make money!

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One way to compare the valuation level on a historical basis for a company like Uber would be to compare it to Facebook. When Facebook went public, its value was a little more than $100 billion. Early investors in Facebook were greeted rather rudely as the stock went down by more than 30% after it went public. Yet with deft management and insightful business acquisitions like Instagram and WhatsApp, seemingly overnight Facebook became one of the most dominant forces of marketing and advertising in the world. Those changes created a lot of value for the company that’s now worth more than $500 billion.

So, if you were fortunate enough to be an early buyer of Facebook on their IPO and held onto the shares even when things got rocky early on, you should have made a bunch of money. Certainly, Facebook’s execution and ability to make the right moves helped propel the company and the stock price forward significantly. With the new crop of IPOs, we need to ask ourselves can the new batch of companies coming to market be counted on to make the right managerial and execution decisions in the future like Facebook has done since its IP?

Conclusion

One final note would be that all this IPO excitement may end up increasing investor attention and appetite for stocks in general. We recommend watching retail investor fund flows very closely to understand if more investors are putting money into the market. It is the hope of many that a flood of popular companies like the ones we’ve mentioned here will reinvigorate people’s appetite to invest and as they consume more stocks, that provides fuel for the market to go higher.
Stay tuned to find out if we end up seeing retail investor follow through to move our suddenly surging stock market to even more robust all-time highs.

This information is for educational purposes only and is not a recommendation, solicitation or an offer to sell any specific security.

Michael Carlin, AIF®, is the President and Founder of Henry+Horne Wealth Management. He can be reached at (480) 483-3489 or MichaelC@hh-wm.com.

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  1. http://fortune.com/2018/10/19/tech-companies-ipos-2019/.