IPO launch activity surged year over year in 3Q, as the economy picked up strength and the broad stock market moved back to all-time highs. The positive backdrop for IPOs brought out a few Unicorns last quarter, and more are waiting in the wings.
Overall in 3Q18, 65 companies (including blank-check funds) went public, up 54% from 3Q17 though down 10% from 2Q18 due to seasonal factors. Meanwhile, the number of Secondaries issued was up 15% year over year — though down 1% quarter over quarter.
Volatility in the U.S. equity markets in 3Q18 was stable compared to the same period a year ago. Though investors were concerned about the Federal Reserve, interest rates, the Trump administration and tariffs, payrolls numbers were strong — suggesting solid economic growth. As well, corporate earnings advanced at a 20%-plus clip. The S&P 500 set an all-time high of 2940 during the quarter, and it ended the period within approximately 1% of the record high level.
The bullish economic and stock-market conditions lifted prices in the quarter. We estimate that the ratio of non-blank-check-company IPOs that opened at prices above the issue price compared to IPOs that opened at or below the issue price was approximately 2.4:1, up from an average ratio of 1.5:1 in 1Q18 and in line with the ratio in 2Q18.
From an industry perspective, IPO activity was consistent quarter over quarter. The top three sectors once again were Healthcare, Finance and Technology.
From a performance perspective, companies that straddle the IT and the Consumer sectors stood out, including:
Three of these companies (SVMK, Eventbrite and Pinduoduo) were Unicorns. Unicorns are private companies with a pre-IPO valuation above the $1 billion level. But not every Unicorn soared on opening day. Autonomous driving company Nio Inc. opened 4% below its issue price. Nio raised $960 million in its IPO and is currently valued at $7.4 billion. Morgan Stanley, Goldman Sachs and JPMorgan led the syndicate for Nio.
We noted a strong surge of IPOs from companies based in China in the quarter, including Pinduoduo; artificial intelligence company LAIX Inc.; online retail pharmacy 111 Inc.; mobile content aggregator Qutoutiao Inc.; and personal finance company X Financial. The average opening above issue price for these five companies was 35%
The designation of worst-performing IPO went to Urovant Sciences Ltd., a clinical-stage biopharmaceutical company focused on urologic conditions. The company raised $105 million and is now valued at more than $345 million, but the UROV shares opened 25% below the offering price. This offering was led by JP Morgan, Jefferies & Co. and Cowen & Co.
Looking ahead, we think the market for IPOs is likely to remain bullish in 4Q, though we suspect the final number of new issues may be below the 2Q and 3Q levels due to the typical seasonal slowdown. On the positive side, economic growth, led by the employment environment, appears solid. As well, corporate earnings are expected to grow at double-digit rate, as the dollar stabilizes, oil prices continue to recover and tax rates decline. The IPO pipeline remains robust, with about 160 companies having filed with the SEC and a number of interesting recent filings, such as Upwork, an online marketplace for free-lance workers; SolarWinds Corp., a provider of infrastructure management software; and Allogene Therapeutics Inc., a clinical stage immuno-oncology company. We look for more biotech, clean tech, medtech and transportation companies to file with the SEC in the weeks ahead.
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 30 Promising Potential IPO
candidates. This list has been selected from companies that have
already filed S-1s with the SEC. The list 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 current management/ownership. Stocks on this list in
our last report that debuted in 3Q include Establishment Labs
Holdings Inc. (ESTA), which opened 44% above its issue price;
Rubius Therapeutics Inc. (RUBY), which opened 33% above its issue
price; and Crinetics Pharmaceuticals Inc. (CRNX), which opened
13% above its issue price, among others.
Table 2 is our Top 40 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. We look for at least a
couple to follow down the path paved last quarter by Survey Monkey,
Eventbrite and Pinduoduo. According to press reports, Uber and
Lyft appear to be targeting 2019 IPOs.
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.
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.