IPO activity was steady in 4Q, as the number of IPOs launched in the quarter was in line with the previous quarter. Investors remained focused on quality, with the ratio of IPOs with positive first-day returns staying the same quarter-to-quarter at 2:1. Unicorns were scarce.
Overall in 4Q19, 39 companies went public, up from 38 companies in 3Q and down slightly from 42 companies during a difficult quarter one year ago. The secondary market firmed, with a 4% increase in issues quarter-over-quarter and a 12% increase year-over-year. We note, though, that 4Q18 was a challenging quarter for issuers: the S&P 500 fell 14% and volatility soared as trade wars heated up and the Federal Reserve raised interest rates.
There were bright spots in the quarter, such as cloud computing. Investors jumped for information technology companies such as Bill.com Holding Inc. (BILL, which opened 69% above its issue price in a deal led by Goldman Sachs, BofA Securities, Jefferies & Co., and Keybanc Capital Markets); Canaan Inc. (CAN, up 40%, led by Citigroup, China Renaissance Partners and CMBI); and SiTime Corp. (SITM, up 30%, led by Barclays Capital and Stifel). They also aggressively bought into select Healthcare companies such as 89bio Inc. (ETNB, up 25%, led by BofA Merrill Lynch, SVB Leerink and RBC Capital Markets); and even a company from the stodgy insurance industry, BRP Group Inc. (BRP, up 24%, led by JP Morgan, BofA Merrill Lynch, Jefferies and Co. and Wells Fargo Securities).
The stock-market environment brightened in 4Q and the major market indices set numerous records. On average, volatility declined about 25% compared to 3Q19. The Federal Reserve, after cutting rates three times in 2H19, moved to the sideline at year-end and indicated rates are expected to be stable in 2020. The trade war with China eased a bit, and the U.K. voted decisively to leave the European Union (when that will happen is another issue). The S&P 500 rallied above 3,200 in December and appears poised for further gains.
Despite the favorable backdrop, only one Unicorn (privately held tech companies valued above $1 billion by venture capitalists) came public in 4Q; that was Bill.com Holding Inc. The market for Unicorns had cooled during the year, as investors lowered valuations for formerly high-flying but unprofitable companies such as Lyft Inc. (LYFT), Uber Technologies Corp. (UBER), Peloton Inc. (PTON) and SmileDirectClub (SDC). The We Company (formerly WeWork) fully withdrew its planned IPO in 3Q after valuation, profitability and corporate ownership questions were raised.
The trade wars cooled investor interest in formerly hot Chinese stocks. 36Kr Holdings Inc. (KRKR), a business services company, and Youdao Inc., an internet content company (DAO), both opened more than 10% below their issue prices.
Looking into 2020, we think the market for IPOs will improve, as the economy proves resilient and the trade wars ease. U.S. GDP growth, led by the consumer sector, 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 amid a global economic recovery. The IPO pipeline is up from recent quarters, with about 95 companies having filed with the SEC. Our analysts see a number of interesting recent filings, such as non-opioid pain company Centrexion Therapeutics Corp.; IT company CloudMinds Inc.; and GFL Environmental Inc., the fourth-largest environmental services company in the U.S. Several Chinese companies look interesting as well, including precision oncology company Genetron Holdings Ltd.; human capital management company CDP Holdings Ltd.; and co-living platform company Phoenix Tree Holdings Ltd.
What’s more, there are additional blockbuster Unicorns in the pipeline, including financial technology company Robinhood, which has been valued above $7 billion; analytics/Big Data company Palantir, which has been valued at $11 billion; and Stripe, a credit card processing company serving websites, which has been valued at $22.5 billion. These companies by now have likely learned from Uber and others that they should be showing profit projections and offering better ownership terms during their road shows.
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
Data sources: Bloomberg, Triad Securities. Recent Prices as of 12/24/2019
Table 2 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 strong management/ownership.
Table 3 is our Top 40 intriguing venture-backed private companies,
including 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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