In a sharp turnaround from earlier this year, stock performance for newly public companies is the worst it has been since at least 1995. This trend has led many companies to delay or reassess their IPO plans. “I don’t see a lot of deals that are likely to go out the rest of this year,” said Rick Kline, co-chair of Goodwin Procter LLP capital markets practice, according to a detailed story in the Wall Street Journal outlined below. “The market sentiment has changed.”
IPOs Lag Market
Tech startups and other companies that went public in 2019 have seen their shares trade about 5% above their prices at the time of their IPOs while the S&P 500 has returned nearly 18% year-to-date (YTD) through Monday, per Dealogic, as cited by the Journal. That trailing IPO performance is a reversal from earlier in 2019, when IPO stocks were dramatic outperformers.
The underperformance of once highly anticipated unicorn IPOs has been driven by increasingly bearish outlooks for companies like Uber Technologies Inc. (UBER), and Lyft Inc. (LYFT). Other newly public companies that were once outperforming the market, such as Slack Technologies Inc. (WORK), are now down, thanks to growing concern about inflated valuations and uncertain pathways to profitability. According to Goldman, this year's IPOs are on track to be the least profitable since the technology boom.
WeWork's IPO Woes
It was mounting losses and rising skepticism from investors that prompted We Co., parent company of co-working network WeWork, to hold off its plans for an IPO after ousting founder and CEO Adam Nuemann.
The deteriorating outlook for IPOs comes at a time that is typically one of the busiest for new issues, per the Journal. This could create a ripple effect through the market, decreasing private funding as investors become unable to cash out loss-ridden startups by taking them public.
“Some companies became convinced that the public market would welcome them with high cash burn and long runways to profitability,” said Paul Hudson, founder and Chief Investment Officer of Glade Brook Capital Partners LLC. “The reality is the public market rewards profitable companies that generate cash flows in addition to growth.” As a result, more companies are choosing to take an alternative route to an IPO, either staying private longer or going for a less expensive direct listing. Within the past couple of weeks, Endeavor Group Holdings Inc. and ADC Therapeutics SA joined struggling We Co. and postponed their listings.
Airbnb is reportedly planning a direct listing in 2020, following companies like Slack and Spotify Technology SA (SPOT), which thus have dodged public scrutiny and underwriting fees.
To be sure, not all of 2019’s IPOs have floundered. Social platform Pinterest Inc. (PINS) has seen its shares jump more than 40% from their initial IPO price, and vegan food maker Beyond Meat Inc. (BYND) is several-fold higher. Also, this may keep prices down for companies planning to come public in 2020, creating buying opportunities, according to the Journal. “I see a lot of exciting companies gearing up for the first half of 2020,” said Goodwin Procter’s Mr. Kline.