IPO turns harsh on unprofitable firms on US stock

Published: September 29, 2019


NEW YORK: Companies making their debut on the US stock market are getting a rough welcome, especially if they are losing money, casting a shadow over the calendar for initial public offerings for the rest of the year.

The surprise postponement of the WeWork IPO has underscored how confidence is eroding in the market both for companies looking to raise capital and investors.

A more discerning market for initial public offerings continued to punish Peloton Interactive Inc on Friday, a day after it began trading. Shares of the fitness start-up closed down 2% at $25.24 and are now off 13% from their IPO price. The company is now trading 15% below its Wednesday IPO price.

Before trading began on Friday, five of this year’s eight deals of $1 billion or more were trading below their IPO price, according to research firm Dealogic. On a broader scale, only about 27% of the 112 deals of $100 million or more were trading below their IPO price. Venture capital firms and other backers of many of these high profile “unicorns” – companies valued at $1 billion or more in the private market – had a higher tolerance for the path to profitability, but eventually they wanted to monetise their stakes.

Investors get more selective

In the past, public market investors have typically expected companies to become profitable within 18 months or so of an IPO. This timeline has been relaxed with money managers eager to add businesses with fast-growing revenue to their portfolios.

Recent deals, however, suggest an uncertain economic outlook is pushing investors to be more selective about which loss-making companies they are willing to back.

Average IPO return drops

Meanwhile, the average IPO return in 2019 was now about 6% at the end of trading Friday, down from more than 30% at the end of June and more than 18% about two weeks ago.

In the United States, much of the attention in the third quarter has focused on a deal that failed to come to fruition – the planned IPO of WeWork parent We Company.

The company had aimed to launch its IPO earlier in September, then postponed plans to list until later in 2019, before replacing its chief executive officer and saying it was reviewing its timetable to go public.

Endeavor Group Holdings, an entertainment and talent agency company backed by Hollywood power broker Ari Emanuel with a track record of losses, made a last-minute decision to abandon its IPO due to the tough market conditions.

Home rental giant Airbnb has said it plans to list its shares in 2020 but provided no details and is widely expected to do a direct listing to go public. In a direct listing no new shares are created and investors can sell their stakes while saving millions of dollars in underwriting fees.

This month the company said it raked in more than $1 billion in second-quarter revenue. It has not given details on whether it was profitable.

Published in The Express Tribune, September 29th, 2019.

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