Despite strong returns in the stock market, IPO activity was light in 1Q19 due largely to the federal government shutdown as well as the lingering effects of a challenging 4Q18 for the financial markets.
We look for IPO activity to return toward normal levels in 2Q19, driven by highly anticipated launches of disruptive Tech-based firms known as Unicorns and Decacorns. This trend started slowly in 2H18 as companies such as SurveyMonkey parent SVMK Inc. (SVMK), ticket company Eventbrite (EB) and Chinese music platform Tencent Music Entertainment Group Inc. (TME) were launched. The trend picked up speed at the end of the first quarter when ride-sharing company Lyft Inc. conducted a successful IPO, raising $2.34 billion on its way to a more than $27 billion valuation, and recording a 21.2% gain in the share price at the opening. Other Unicorns expected to go public in 2Q -- while the positive market fundamentals remain in place -- include videoconference company Zoom Inc., photo-bookmarking site Pinterest and food delivery company Postmates.
There were bright spots in the quarter other than Lyft. Clothing company Levi Strauss & Co. Inc. (not a Unicorn) saw its shares soar more than 30% at the open while raising $600 million. Several Healthcare companies (ShockWave Medical, Hoth Therapeutics and Gossamer Bio) also posted double-digit opening gains.
Overall in 1Q19, only 23 companies went public -- the lowest total since 1Q16, when oil prices fell below $30 per barrel. Investors were expecting a bear market, and only 11 companies debuted on U.S. exchanges. The secondary market held up better in 1Q19, as the number of companies raising additional funds increased 21% compared to 4Q18.
The 35-day government shutdown slowed the Securities and Exchange Commission, which was unable to review much IPO documentation and provide guidance to companies. In addition, the IPO markets entered 1Q on a soft note as stocks had sold off sharply in late 4Q due to Brexit worries and trade war concerns.
However, the stock-market environment improved during the quarter. Volatility eased in 1Q19 compared to 4Q18. The Federal Reserve announced that it was winding down its tightening campaign, and the U.S. and China made progress in trade discussions. Brexit remains an issue. The S&P 500 rallied above 2,850 in late March before consolidating somewhat at the end of the quarter. The VIX volatility index consistently dropped in the quarter, from 28 in late December to the mid-teens in March.
The IPOs that did come out in the quarter received mixed reviews from investors. The ratio of IPOs that opened at prices above the issue price compared to IPOs that opened at or below the issue price was approximately 6:5, the same as the rate in 4Q.
Some of the strongest performances, from a first-day perspective, were from companies launched by Goldman Sachs, JP Morgan, Morgan Stanley and BofA Merrill Lynch, including the following.
The designation of worst-performing IPO went to IMAC Holdings Inc., a chain of integrated medicine and chiropractic regeneration centers. This offering was led by Dawson James Securities and Cuttone & Co., and opened 32% below its offering price.
Looking into 2Q19, we think the market for IPOs is likely to pick up from the two latest quarters. On the positive side: economic growth, led by the employment environment, appears solid at around a 2.0%-2.5% rate; and corporate earnings are expected to grow at a mid- to high-single-digit rate as the dollar stabilizes and oil prices start to recover. The IPO pipeline may be down a bit from recent quarters, with about 115 companies having filed with the SEC (again reflecting the government shutdown). But there are a number of interesting recent filings, such as Change Healthcare Inc., a healthcare technology company; and Silvergate Capital Corp., which is focused on the digital currency industry.
We also look for corporations to prune their business portfolios and raise assets through the public markets. As an example, General Electric has announced that it is considering a spinoff of its healthcare subsidiary in an IPO. In addition, VF Corp. plans to spin off its jeanswear business; and Glaxo SmithKline has plans to spin off its consumer healthcare business, which it is boosting through a joint venture with Pfizer.
Finally, investors continue to await the blockbuster Unicorns such as Uber, which could be valued as high as $120 billion; Airbnb, which has been valued above $30 billion; and workplace company Slack, which may take a direct-investment approach.
In the tables on the following pages, we highlight select companies that our analysts think 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 30 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, a brand name, attractive industries and strong management/ownership.
Table 2 is our Top 40 intriguing venture-backed private companies, including the 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.
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