The IPO and secondary markets, which had shut down with the rest of the country in late March to battle COVID-19 and had endured a challenging 1Q, roared back to life in 2Q. Activity was led by Technology and Healthcare IPOs and by Fortune 500 companies raising capital while operations -- and balance sheets -- were being devastated by the pandemic.
Quarter-to-quarter, IPO activity jumped 80% in 2Q. By the numbers, 46 companies raised funds through IPOs in 2Q20, up from 25 in 1Q20, though down from 68 in 2Q19, when the industry benefited from pent-up demand related to the Federal government shutdown and trade wars with China. Secondary offerings also shot higher in 2Q20, rising 74% quarter-over-quarter and 47% year-over-year.
High-quality companies came public in 2Q, and investors, suffering from pent-up demand and no doubt tired of the overhyped Unicorns that had issued stock in recent quarters, snapped them up. The ratio of positive issue-opens to negative issue-opens jumped to 5:1 in 2Q from 2:1 in recent quarters.
Investors favored industries that appear well positioned to thrive on the other side of the pandemic, such as Biotech, Medical Devices and Genetics in Healthcare, and Cloud-Based Connecting Platforms from the intersection of the Tech and Communication sectors.
Starting with Tech, investors bid aggressively for the Real-Time Engagement Platform-as-a-Service company Agora Inc. (API), which opened 125% above its issue price in a deal led by Morgan Stanley and BofA Securities; the cloud-based marketing platform company ZoomInfo Technologies Inc. (ZI), which was up 90% at the open and was led by JPMorgan, Morgan Stanley, Credit Suisse, Barclays Capital and BofA Securities; and Vroom Inc. (VRM), which operates an ecommerce platform, was up 81% and was brought public by Goldman Sachs, BofA Securities, Allen & Co. Inc. and Wells Fargo Securities.
Investors also had intense interest in innovative Healthcare companies such as Inari Medical Inc. (NARI), which was up 117% at the open in a deal led by Morgan Stanley and BofA Securities; Forma Therapeutics Inc. (FMTX), which was up 100% and led by Jefferies & Co., SVB Leerink and Credit Suisse; and Applied Molecular Transport Inc. (AMTI), which was up 86%, and was led by BofA Securities, Jefferies and SVB Leerink.
BofA Securities issues had the best returns in 2Q20, based on our analysis of the underwriters. BofA Securities was a syndicate leader for 15 issues that, on average, opened 46% above the offering price. Jefferies & Co. was second, with 15 issues that, on average, opened up 32%. Morgan Stanley, Credit Suisse and Citigroup also worked on at least 10 deals that, on average, opened up at least 20%. Full details on the underwriter performance are in Table 4 of this report.
But not every company that is seemingly well positioned for the post-pandemic world rewarded investors. Esports Entertainment Group Inc. (GMBL), an on-line gambling platform that looked promising as Las Vegas was closed, opened 29% below its offering price in a deal led by Maxim Group and Joseph Gunnar Co. VerifyMe Inc. (VRME), which offers technology solutions specializing in brand protection, counterfeit protection and track and trace, opened 24% below its offering price in a deal also led by Maxim Group and Joseph Gunnar Co. Finally, Aditx Therapeutics, a Healthcare company focusing on the immune system, opened 56% below its offering price in a deal led by Dawson James Securities.
The Unicorn trend appears to be winding down. Only four Unicorns (privately held companies valued above $1 billion by venture capitalists) came public in 2Q: ZoomInfo Technologies and Vroom Inc., which we detailed earlier; and Kingsoft Cloud Holdings (KC) and Dada Nexus Ltd. (DADA). All were successful -- up on average 50% -- in contrast to the poor receptions in recent quarters for formerly high-flying but unprofitable companies such as Lyft Inc. (LYFT), Uber Technologies Corp. (UBER), SmileDirectClub (SDC) and WeWork, which never got off the ground. Looking ahead, we do not expect much investor appetite for cash-burning Unicorns in 2020.
But if demand for Unicorns is winding down, demand for Secondaries is picking up. During 2Q, capital was raised by established companies from struggling industries such as Airlines (American Airlines, Southwest Airlines, United Airlines Holdings); Cruise Lines (Carnival Corp., Norwegian Cruise Lines); Restaurants (Brinker International, Darden Restaurants, Dave & Buster’s Entertainment); Energy (Oneok Inc., Eversource Energy); and Telecom (T-Mobile USA). The cooler company YETI Holdings held two secondary offerings in the quarter; perhaps everyone is going camping.
We have noticed a trading pattern emerge on some of the more beaten-down stocks. For example, the LUV shares of Southwest Airlines were down 50% from 52-week highs when the company priced a Secondary at a further 4% discount to the prior-day’s closing price. By the end of the day the Secondary was issued, the LUV shares had risen 5%. This is a pattern we also saw with Brinker International (EAT) and BlackRock (BLK).
The stock-market environment (a key indicator for IPOs) settled down a bit compared to a volatile 1Q, as the country moved out of a national shelter-in-place phase and states started to reopen their economies. The Federal Reserve has stepped up to support markets, with numerous programs backstopping everything from money market mutual funds to corporate bonds. Congress and the Trump administration are likely to agree on another fiscal stimulus plan this summer (on top of $3 trillion already spent) to further support the economy ahead of the fall presidential election. The Argus economics team forecasts two quarters of deep recession in 2Q20 and 3Q20, before the economy starts to grow again in 4Q20. That also assumes a second wave of COVID-19 does not materialize and send the entire country -- including the IPO markets -- back to shelter-at-home status.
We have not been particularly surprised by the comeback in IPOs and Secondaries. As we noted in our 1Q report, raising and allocating capital are among the nation’s core competencies, and the country is a global leader in the industry. We had expected that Secondaries would come back strong, as companies from hard-hit industries such as Travel, Retail, Restaurants and Energy look to raise capital. Also as expected, investors are again eager to snap-up Biotech and Genetic companies. Looking ahead, the IPO pipeline is up from recent quarters, with about 115 companies having filed with the SEC.
In addition, there are some promising blockbuster Unicorns in the pipeline, including autonomous driving company Waymo, which had been valued at $30 billion prior to the onset of Covid-19; analytics/Big Data company Palantir, which had been valued at $12.2 billion; and Stripe, a credit card processing company serving websites, which had been valued at $36 billion. These companies by now likely have learned from Uber and others that they should be showing profit projections and offering better ownership terms during their roadshows.
In the tables on the following pages, we highlight select companies that our team of analysts thinks may be poised to enter the IPO markets at potentially attractive prices.
John Eade, President, Argus Research Jasper Hellweg, Security Analyst
Table 1 features the Argus Top 20 Promising Potential IPO candidates. This list has been selected from companies that have already filed S-1s with the SEC. It is based on factors that Argus believes are important for success in an IPO, including sales and earnings growth, a clean balance sheet, brand names, attractive industries, and experienced management/ownership.
Table 2 is our Top 20 Unicorns. This list includes companies in emerging industries such as cybersecurity and Big Data analytics, as well as companies whose investors include well-known groups such as Kleiner Perkins and Andreessen Horowitz.
Source: www.sharespost.com; cbinsights.com; The Billion Dollar Start-up Club; www.techcrunch.com; www.crunchbase.com; www.wsj.com; www.bloomberg.com; www. fool.com; www.pitchbook.com; Argus Research.
Table 3 shows the performance of the largest 2Q IPOs.
Data sources: Bloomberg, Triad Securities. Recent Prices as of 3/26/2020
Table 4 is our ranking of underwriters, based on deals done and performance generated.
Copyright Argus Research Company. This report has been prepared for Triad Securities Corp. by Argus Research, a thirdparty investment research company. This report has no regard to specific investment objectives, financial situations or the particular needs of any recipient. It should not be considered an individualized recommendation. All investors are encouraged to use multiple sources of investment information and to actively monitor their holdings. The security or industry discussed may not be suitable for everyone.
THIS REPORT IS BASED ON INFORMATION FROM A VARIETY OF SOURCES AND STATISTICAL DATA BELIEVED TO BE RELIABLE, BUT IN NO WAY ARE WARRANTED AS TO ACCURACY, TIMELINESS, COMPLETENESS OR RELIABILITY.
Any opinions expressed are statements of judgment by Argus as of the published date of this report and are subject to change without notice. Argus does not undertake to advise you, nor is it under any obligation to advise you, as to any changes in its estimates or views. This report is published for informational purposes only and is not to be construed as a solicitation or an offer to buy or sell any security. Argus, its affiliates, officers, directors, employees, stockholders or members of their families may have long and/or short positions in and may purchase or sell from time to time any of the above-mentioned or related securities.
A registered principal of Triad Securities has reviewed and approved this report. Triad Securities believes this report to be reliable, to contain no untrue statement of material fact, and to be otherwise not false or misleading.
Triad has selected Argus to prepare research reports that Triad and Argus believe may be relevant for Triad's customers. Triad Securities does not have any material conflict of interest that has influenced its choice of Argus to prepare research reports or the subject company of any of Argus' reports. Triad does not manage or co-manage public offerings of securities, including securities of any subject company; has not received compensation for investment banking services from any subject company in the past 12 months; and does not expect to receive or intend to seek compensation for investment banking services from any subject company in the next three months. Triad does not beneficially own 1% or more of any class of common equity securities of any subject company. Triad does not make a market in any securities, including securities of any subject company. Triad does not know of any other material conflict of interest of Argus or Triad, or any of their personnel, which would influence the content of any research report.