Industries planning to enter the U.S stock market are having a markedly hard time, especially those companies that are in the red on the balance sheet.
After the debacle involving American real estate company WeWork, the Initial Public Offering (IPO) market grows more stringent and stricter than ever before, slamming their doors for particularly unprofitable businesses.
The unexpected postponement of the WeWork IPO cast a growing shadow over the timing and calendar of the initial public offerings for the year. The event also underscored a deeper problem: confidence in the market is slowly eroding, both for companies looking to raise capital and investors.
This is made more apparent by several more instances. A day after it began trading, Peloton Interactive Inc. shares closed down 2% at $25.24, and are now below their initial trading price by 13%.
According to research firm Dealogic, five out of eight startups amounting to $1 billion or more were trading below their IPO price. Looking at the broader sample size, about 27% of 112 $100-million startup deals were below IPO trading price.
Backers of these high profile companies – those firms with values of over $1 billion in the private market – and venture capital firms are often more tolerant of these changes but eventually wanted to monetize their stakes.
In the past, expectations by public market investors were that companies would start to be profitable within the first 18 months of an IPO. However, this timeline has shifted, fund managers add businesses with fast-growing revenue in their portfolio, alleviating some of the pressure from non-profitable companies.
Recent studies suggest, however, that investors are getting more selective in their choices in loss-makers, after a bleak economic outlook cause uncertainties.
Peloton reported significant growth; their top-line increase of 100% for the period ended June 30 proves that they can make revenues. But a 140% surge in operating expenses resulting in negative operating leverage suggests otherwise.
According to research body RenaissanceCapital, SmileDirectClub, a tooth-alignment company that operates on a loss, became the first U.S. IPO in three years to close down on its first trading day, after pricing above its target range.
Dealogic also notes that SmileDirectClub trades at down over 40% since their inception in early September, making the firm the current worst performer among the $1 billion and above IPO deals.
BIGGEST GAINERS AND IPO RETURNS
The most prolific performer among the $1 billion group is social media website Pinterest with their shares up by almost 40% since their debut in the public market. Their financial statements showed that revenue climbed by about 60% in the first half of 2019 as compared to the same period last year. Net operating cash outflow during the same period fell from $29 million the previous year to $16 million this year.
Beyond Meat Co., a Los Angeles company operating on the plant-based meat substitutes niche, entered the market last May through a meager $227 million deal. Since then, their shares have surged by almost five times. Sporting a top of the line growth that tripled, Beyond Meat outpaced their operating expenses, which only doubled.
Amidst all of it, the average IPO returns in 2019 have fallen to about 6%. This is a sheer drop from above 30% at the end of June and more than 18% from about two weeks ago.
In the U.S., much of the attention in the third quarter regarding IPO focused on WeWork parent company We Company, a deal that pretty much failed to come to life. They had planned to launch an IPO in September, then deferred the IPO for later. After replacing its chief executive officer, We Company once again reviewed its timetable for the IPO.
Entertainment and talent agency Endeavor Group Holdings, backed by a Hollywood power broker Ari Emanuel with a known string of losses, abandoned its IPO in a last-minute decision because of the harsh conditions of the market.
Home rental giant Airbnb plans to do a direct listing rather than an initial public offering, in hopes of going public. The company plans to list their shares in 2020, but facts beyond that are mostly unknown at this point.
Investors have started to stay away from companies with a string of losses, especially those who lack their timetables on when they will be profitable. Public investors are learning from the problems faced in early 2019 by ride-hailing companies Uber Technologies and Lyft Inc.
David Ethridge, U.S. IPO services leader at PriceWaterhouseCoopers, says that bankers, the board of directors, and senior management teams of firms will talk about these incidents, and say that they are mainly unrelated cases, or they were mere shifts of sentiments.
WEWORK JUNK BONDS NOSEDIVE
WeWork floated a $669 million high-yield debt bond on May 2018, and this bond plunged to record-low prices in September, while WeWork’s stock never made it to the market.
The 7.875% bonds due in May 2025, fell from 96 to 87 cents, a mere 1.5 cents shy from its lowest point at 85.5 cents last January.
However, its effective interest moves in the opposite direction, shooting up to 11%. Its spread ballooned to 9.5%, a vast amount. The stock spread is the measure of added money demanded by investors for them to hold the bond instead of investing in government securities. A higher spread amount means a wider spread, and the riskier it is to keep the bonds.
In August, the bond was at a record high 105 as We Co prepared for the IPO. As the deal dissolved, however, concerns on the company’s funding have started to surface, and the bond value has continued to slide down.