5 Things To Know About The $250 Billion Of Tech IPOs Coming To Market

Newsbeat

Koyfin This year is setting up to be a blockbuster for IPOs particularly in the tech space. Over the past several weeks large companies such as Slack and Uber have voiced their intention to IPO. Others are even further along in the process. Lyft filed an S-1 on March 1 with details about its finances and even a ticker picked out (LYFT). In total, companies with about $250 billion of market cap are planning to IPO this year. With that, here are five things to keep in mind related to the IPO market. 1) IPO performance is an important risk-on, risk-off indicator for the stocks The IPO market tells investors a lot about the risk environment based on the notional amount sold through IPOs, and how the shares trade after. A robust IPO market signals high liquidity and enthusiastic demand to invest in risky new shares. A muted IPO market suggests risk appetite is suppressed. Over the past 3 years, IPO shares have generally outperformed the S&P 500. In 2006 – mid 2018, the amount of IPOs steadily increased and new shares outperformed the market. To track the performance post the offering, the IPO ETF is a good barometer. The ETF tracks the rules based Renaissance IPO Index, which adds sizeable new companies on a fast entry basis and the rest upon scheduled quarterly reviews. Companies that have been public for two years are removed at the next quarterly review. In July 2018, the IPO ETF peaked vs. the market and started underperforming. This was a harbinger of the market sell-off which started in October. The IPO ETF bottomed relative to the market at the end of December, and has rallied since. Since 2016, performance of tech companies after IPO is a mixed bag with Software leading Focusing on the tech sector, the largest IPOs over the past 3 years are a mixed bag. Some companies such as Docusign (+91.6% since IPO), Ceridian (+116%) and Pluralsight (+120%) have done very well. All three are in the software space. Others like GreenSky (-51%), Sogou (-53%) and Trivago (-52%) have disappointed investors since their IPO. The biggest IPO in recent memory, Snap is down 42% since its debut 2 years ago. Smaller IPOs particularly in the SAAS sector have fared much better. For example, Okta (OKTA) went public on April 6, 2017 at $17 per share. Even buying the stock after its first day pop has produced a 230% return. However, not all SAAS IPOs have done well as Dropbox (DBX) is down 22% since its first day of trading IPO offerings have slowed since 2014 before an expected pickup in 2019 The notional value of US IPOs was about $20B and declined through the end of 2015 as investors waited for the US election for clarity. After the presidential election in 4Q2016, the amount increased steadily to $15b per quarter in the middle of 2018. Since then, the offering amount per quarter has declined back to $5b per quarter. The rush to IPO is probably related to the presidential election in 2020 and recent economic weakness From a company’s perspective, deciding whether to IPO depends on many variables. However, the recent rush to IPO in 2019 is probably related to 2 macro factors. First, the presidential election in 2020 will likely cause uncertainty similar to 2016 when the IPO market took a pause. Second, recent economic slowdown has increased the odds of a recession in late 2019 or 2020. Private companies want to get ahead of any recession when the IPO market will undoubtedly cool. 5) Large tech IPOs in the pipeline have a combined private market value of $250 billion The details of upcoming IPOs have only recently started to trickle in and most companies have not released any detailed filings about size or valuation. The combined private market value of the largest tech IPOs is $250b. Assuming that 20% of the market cap will be floated in an IPO suggests about $50b of notional offerings in the next 12 months in the tech sector. The implications for the stock market depends on several factors. All else equal, IPOs are negative for the overall market because it increases the supply of overall equity. Investors need to sell other stocks in order to buy an IPO (unless there’s idle cash). However if IPOs are well received by investors and trade strongly after, this would indicate a bullish market with robust liquidity. This was the type of market in the late 90’s.