IPO Fever

IPO fever pitch has set in again. Ride-sharing start-up, Lyft, priced shares at $72 last night, which was the high end of its range, setting its valuation at over $24 Billion. The stock exploded higher with its first trade at $87.24, a 21% spike. It closed the day at $78.29. Levi’s caught a strong bid last week as the San Francisco based Gold Rush era start-up returned to the capital markets. Coming up next is a slug of new deals, led by UBER, Pinterest, Airbnb, Palantir and WeWork. They call them the “Unicorns.” Does it feel like the Dot.com bubble days from 2 decades ago? Well, there are many similarities in place. The IPO market in 2019 just might eclipse the record IPO run from 1999, which ultimately led to the bubble bursting. Bankers and venture capitalists are rushing to Wall Street to get these deals done in this environment. The attitude sure looks like it’s get in and get out, while the gettin’ is still good.

Wall Street loves cash hemorrhaging VC-backed Tech IPOs again. Lyft has purportedly doubled its revenues the last 3 years. That’s impressive growth. But it also lost $1 Billion last year, 1/3 more than the year before. Uber’s losses are rumored at close to $2 Billion a year. The big question for investors, and the Market in general, is if the massive losses these companies have been reporting so far will be ignored with belief that the explosive revenue growth will pay off. What does it say about a Market where companies are enthusiastically embraced who not only are not profitable, but don’t have a plan to profitability anytime soon. The opportunity is massive, no doubt, but how long will investors float Billions of Dollars to a business that doesn’t make money and doesn’t have a plan to anytime soon? In the year 2000, that reality turned on a dime.

There is a good chance 2019 will have an all-time record for initial public offerings. Expectations right now have over $100 Billion in new stock coming to market. That would eclipse the record $97 Billion of IPOs in 2000 and $93 Billion in 1999. There were 446 IPOs in 1999 and the average gain was 71% on the first day. The surge was on. But it didn’t last long. In the Spring of 2000, the world finally realized that companies that don’t make money aren’t worth anything. The Dot.com rush helped the IPO market start off 2000 with a bang, but it was short-lived due to the internet crash.

Remember Webvan? The grocery delivery company went public in November of 1999 with a valuation of $8 Billion, despite the fact that at its peak, it generated revenues under $200 Million. It was not profitable and had no plans to be. At the time, the company only served the Bay Area with its Oakland warehouse. The stock surged 65% in its IPO. Webvan had grand plans to expand across the country in the year 2000. It ended up losing $800 Million, filing bankruptcy in 2001 when its stock went to zero.

Hot IPO’s have often brought near-term Market tops. 2007 was the biggest year for IPO’s since the Dot.com bubble burst, and you remember what happened in 2008. For what it’s worth, Blackstone, the large private equity firm was the largest IPO in 2007. We learned when private equity goes public, it pays to take notice. In September, 2014, Chinese e-commerce giant Alibaba raised $22 Billion as Wall Street excitedly embraced the new stock offering. The DOW and S&P were 10% lower a month later. And who could forget Facebook’s famous IPO. It was considered a once in a lifetime opportunity to invest in this unique disruptor. Shares were added for sale during the roadshow, diluting the deal, and the stock closed the day exactly where it was priced because the Street needed to keep it propped up before ultimately letting it go below its $38 offering price which ended up bottoming out around $17, just 4 months later.

Indeed, there are some major differences in today’s Tech world from 2 decades ago. The most obvious is that the top 5 most valuable American companies today are all technology companies. The list is Apple, Microsoft, Amazon, Alphabet and Facebook. These companies have very secure business models and are very profitable. Apple, Microsoft and Amazon survived the Dot.com bubble burst and innovated to build their respective empires. It took years for Amazon to turn a profit. But Amazon changed an industry and how consumers buy like no other. It really stands alone in that regard. And even Amazon’s stock is not immune to sell-offs.

IPO stands for Initial Public Offering. But when the IPO environment reflects Insanely Priced Opportunities, we take note and embrace a great deal of caution. We won’t be surprised to look back on this period as one that was excessive for the Stock Market. Periods of excessive enthusiasm near highs tend to lead to declines. We are working on our Quarterly Newsletter which will outline our action plan for the Spring into Summer. It will go out next Friday. We see yellow lights flashing.

Have a nice weekend. We’ll be back, dark and early on Monday.


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