IPO activity picked up in 2Q19, as expected, driven by investor interest in a number of long-awaited Unicorns that came public during the quarter. More IPOs were successful for investors, too, as approximately 20 IPOs opened at least 30% above the issue price.
The Unicorn 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 at the end of 1Q19, when ride-sharing company Lyft Inc. conducted its IPO. In 2Q19, the floodgates opened, and eight Unicorns conducted IPOs. These companies ranged from videoconference company Zoom Video Communications (ZM) to photo-bookmarking site Pinterest (PINS) to transportation company Uber (UBER) to online consignment retailer RealReal (REAL).
Most of the Unicorns rewarded investors who were able to get in on the offering. Zoom’s stock opened 80% above the issue price; Pager Duty (PD) opened 53% above the issue price; RealReal opened 40% above the issue price; and Jumia Technologies (JMIA) opened 31% above the issue price. Uber – the most anticipated of the Unicorn group – disappointed by opening 7% below its issue price.
There were bright spots in the quarter other than Unicorns. Investors snapped up consumer-oriented companies. Plant-based meat-substitute Beyond Meat (BYND) saw its shares soar more than 84% at the open.
Another food-related company, Grocery Outlet Holding Corp. (GO), rose 41%. Even food for pets was popular, as Chewy Inc.’s CHWY shares opened 63% above the issue price. Meanwhile, Revolve Group (RVLV), a fashion retailer for Millennials, soared 39% above the issue price; and Greenlane Holdings (GNLN), a leading vape supply distributor to dispensaries and smoke shops, jumped 70% at the open.
Overall in 2Q19, 68 companies went public, up more than 200% from a slow 1Q19, when the U.S. government shut down, forcing companies to face additional filing challenges. The secondary market also improved, with a 9% increase in issues quarter over quarter.
The stock-market environment remained stable in 2Q. On average, volatility was similar in the quarter to 1Q19. The Federal Reserve, having turned neutral in 1Q, began to lean more toward easing in 2Q as it turned its focus toward stubbornly low inflation. Brexit remains an issue, as do the trade wars (China) and geo- political threats (Iran). Despite it all, the S&P 500 rallied above 2,850 in late June before succumbing to a bit of profit-taking at the end of the quarter.
As mentioned earlier, the IPOs that did come out in the quarter received generally positive reviews from investors. We estimate that 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 2.5:1, up from a 6:5 ratio in the previous two quarters.
From a first-day perspective, some of the strongest performances were from companies in Healthcare.
The designation of worst-performing IPO went to Axcella Health Inc. (AXLA), a biotech company. This offering was led by Goldman Sachs, JPMorgan and SVB Leerink.
Looking into 2H19, we think the market for IPOs will remain active. 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 85 companies having filed with the SEC – perhaps still reflecting the impact of government shutdown during the winter. But there are a number of interesting recent filings, such as the sharing economy company The We Company (formerly WeWork), which has filed confidentially; Avantor Inc., a business services company; and Wanda Sports Group, a worldwide sports event and media platform.
We also look for corporations to continue pruning their business portfolios and raise assets through the public markets. As an example, General Electric has announced that it is considering spinning-off its healthcare subsidiary in an IPO. In addition, Danaher Corp. plans to spin-off its dental business; and Glaxo SmithKline has plans to spin off its consumer healthcare business, which it is boosting through a joint venture with Pfizer Corp.
What’s more, there are additional blockbuster Unicorns in the pipeline, including Airbnb, which has been valued above $30 billion; and Hulu, the online streaming service, which has been valued at $27.5 billion.
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.
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, brand names, attractive industries,
and strong management/ownership.
Data sources: Bloomberg, Triad Securities. Recent Prices as of 7/1/2019
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.
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.
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