A record $80 billion is expected to be raised by U.S. IPOs in 2019, with tech companies at the forefront, Bloomberg reports. "Cycles end when everything looks great, but the point at which supply overwhelms demand [is when rallies die]," as Michael Shaoul, chief executive officer at Marketfield Asset Management LLC, told Bloomberg. Shaoul is among those observers who question whether the market can absorb the upcoming flood of IPOs, which will include some big money losers.
Some 83% of the companies that went public in the first nine months of 2018 lost money in the 12 months leading up to the IPO, a greater percentage than during the peak of the Dotcom Bubble in 2000, according to CNBC.
Among the high-profile tech sector initial offerings expected in 2019 are ride-hailing services Uber and Lyft, online home and apartment rental service Airbnb, and Slack, which offers a cloud-based business communication, file sharing and messaging platform. The table below lists their possible values.
4 Big Tech IPOs
(Possible Value of Initial Public Stock Offerings)
- Uber: $120 billion
- Airbnb: $31 billion
- Lyft: $30 billion
- Slack: $7 billion
Sources: Bloomberg, CNBC
Significance for Investors
The projected $80 billion value of U.S. IPOs in 2019 comes from Goldman Sachs. They started with a more conservative combined valuation of $150 billion for six big unicorn tech companies. Then they assumed that pre-IPO placements with big private investment funds would absorb 80% of these offerings, leaving $30 billion for the public IPO markets. The remaining $50 billion would come from a host of other companies seeking to cash in before the bull market comes to an end.
"Aggregate IPO activity has generally been elevated towards the end of the cycle as companies seek valuations at high multiples," Goldman strategists wrote in a Nov. 2018 note to clients, as quoted by Bloomberg. The last year in which three U.S. tech companies valued at $10 billion or more went public was 2000, per the same article.
Why 2019 IPO supply may overwhelm demand. Bloomberg makes three observations based on Dealogic data. First, $80 billion would be about double the annual average from 1990 onwards. Second, looking at the ratio of money raised in IPOs to the market capitalization of the S&P 500 Index (SPX), $80 billion would put the ratio 81% higher than the average of the last five years. Third, this would create the largest one-year jump in that ratio since at least 1995, for an increase more than three times greater than the average annual change.
Record percentage of unprofitable issuers. When the Dotcom Bubble peaked in 2000, 81% of IPOs were from unprofitable companies, many of which ceased to exist shortly thereafter. Based on data from 1980 onward, in the first nine months of 2018 a record 83% of IPOs were from money losing enterprises, according to Jay Ritter, a professor of finance at the University of Florida who specializes in research related to IPOs.
Unprofitable growth. "Start-ups are each trying to ignite the winner-take-all dynamics through rapid expansion characterized by breakneck and almost invariably money-losing growth, often with no discernible path to profitability," is the conclusion of University of California professors Martin Kenney and John Zysman, in an upcoming paper quoted by Financial Times columnist and associate editor Rana Foroohar. "Low barriers to entry result in many competitors and a race to spend as much as possible to grab market share...the private companies that emerge from this unproductive cycle become bloated," she adds.
Accelerating losses. Uber lost $1.1 billion in the quarter ending Sept. 30, 2018, while revenue growth was at half the rate of six months earlier, per Bloomberg. Lyft lost $373 million in the first half of 2018, 46% more than in the same period of 2017, despite revenue that was 88% greater, per Business Insider. Lyft's revenue growth also is decelerating rapidly; it had more than tripled from the first half of 2016 to the same period in 2017.
Clouding the outlook for Uber and Lyft, they have made urban traffic congestion worse. They are less efficient than taxis since their cars spend much more time riding empty on busy city streets, as Joseph Vitale, head of the global automotive practice at Deloitte, told Barron's. He notes that usage of ride-hailing services actually has dropped among the heaviest users.
Profits under wraps. Airbnb has declined to release profit figures, but a source close to the company indicates that it earned $100 million on $2.6 billion of revenue in 2017, per CNBC. Airbnb did report that third quarter 2018 revenues exceeded $1 billion. Slack has about $200 million in annual recurring revenue, per TechCrunch, but has not revealed profit figures.
Slack files for IPO
On Feb. 4, 2019, Slack issued a press release indicating that it has confidentiality submitted a draft proposal to the SEC to publicly sell shares of Class A common stock. The company did not say how much it intends to raise or how many shares it would sell if the SEC approves its registration.
While many tech IPOs during the Dotcom Bubble era disappeared, some big winners did emerge, such as Amazon.com (AMZN). Skeptics, of course, will point out that Amazon still bears an excessive valuation, with trailing and forward P/E ratios of about 80 and 60, respectively. Picking the winners from the losers in the IPO market is always difficult, but it may be even more so this late in the market and economic cycles.