Investors in 30 newly listed public companies such as Uber Technologies Inc. (UBER), Zoom Video Communications Inc. (ZM), and Pinterest Inc. (PINS), which have suffered a series of selloffs after their highly anticipated IPOs, could experience even sharper downdrafts by year-end, as outlined by the Financial Times.
Lockup Clauses Expiring
In the upcoming weeks, lockup clauses for newly public companies are slated to expire, meaning that company insiders and pre-IPO investors will be able to start selling their shares. This doesn’t only spell bad news for the companies themselves. The larger risk facing the market is that a selloff of money-losing companies including Uber, down 30% from its initial IPO price, will cause a ripple effect and drag down other stocks, as well as hurt prospects for soon to be public companies.
“We track upcoming lockup releases because stock prices tend to sag ahead of the release,” said Renaissance Capital’s Kathleen Smith, as cited by Barron's. “Of particular concern are companies whose shares have traded poorly since the IPO. The expectation is that insiders will be anxious to sell, putting downward pressure on the share price.”
Uber at Risk
Out of the dozens of newly listed companies that are set to see their lockup periods expire before the end of 2019, ride-sharing pioneer Uber is one of the most watched of the group, and was the largest listing of the year. The San Francisco-based company has suffered as investors shift away from loss making mega-unicorns to more defensive, safer pockets of the market.
“Uber does not have a sustainable business model — the stock will drop when the lock-up period expires,” said Michael Underhill, chief investment officer of Capital Innovations. “That will have a flow-on effect — there will be more selling.”
'Reevaluation of Growth'
IPO expert and University of Florida finance professor Jay Ritter echoed the downbeat sentiment. “There has definitely been a drop in the valuations of companies that had a lot of growth optimism built in to their share price. Across the board there has been a revaluation of growth.”
Zoom and Pinterest lockup periods are also expected to expire in 2019. This could put pressure on already beaten down shares of Lyft Inc. (LYFT), Peloton Interactive Inc. (PTON), and others. Lyft shares have fallen near 45% from their IPO price, and Peloton is lower about 25%.
The expiration of the lockup periods also casts a shadow on other not yet public companies such as The We Co, parent company of coworking network WeWork, which postponed its IPO plans earlier this year following the ousting of its CEO and founder Adam Neumann.
The Financial Times notes that tech companies favored by venture capital groups face some of the greatest headwinds. VC-backed IPOs see their stocks drop an average of 3% when a lockup period concludes, compared to non-VC-backed IPOs, which fall about 1%, according to UF professor Jay Ritter.
VC-backed companies include Airbnb, Postmates and Palantir. While all three were expected to go public this year, they are projected to do so in 2020. Many, including Airbnb, are weighing a direct listing, wherein there is no investment bank, no money is raised, and the market sets the price of the shares.
Moving forward, investors will be hard on companies that cannot show a promising path to profitability and prove that their business models are sustainable.
“You see the sense of urgency from the venture capital community — they are concerned,” said UnderHill, comparing the current environment to the tech bubble in the 90s. "It feels like 1999... We are late cycle. Companies that don’t have sustainable business models will not be rewarded in the capital markets.”
In a recent Bank of America Merrill Lynch report titled "We're gonna IPO like it's 1999," analysts noted that, "IPO withdrawals could be a warning sign that investors are shifting focus to profitability amid macro concerns, and the potential ripple effect could be significant."