Over the next few months, there is going to be a tsunami of Initial Public Offerings (IPOs) hitting the market. Here are the best bets, the ones to steer clear of, and what it might mean for the overall stock market.
After a relatively dry spell with just 320 total public offerings in the past three years — and none during the last quarter of 2018 or January as market conditions and government shut down put IPO’s on hold — 2019 is set to see a deluge of IPO’s; some 220 companies are expected to go public, raising over $700 billion and possibly representing a total market cap of over $2 trillion.
The former number is still dwarfed, nearly 600 companies that came to market during 1999 dot.com days, but the capital expected to be raised will set a record.
This prompts a question: Can the market absorb the large supply without forcing money managers to sell off existing positions in order to raise money to invest in the new listings, creating a net negative effect on overall market performance? Few market analysts think this will be a problem especially if retail investors get excited and start putting new money to work.
But this brings up the bigger concern; namely several of the largest and most widely known companies do not yet turn a profit, leading some to think we are heading towards a similar situation to the dot.com daze, when investors piled into hot names or sectors only to be left badly burned when the companies went bust.
One difference between the IPOs coming this year compared to the dot.com era is that the 2019 vintage are all relatively mature companies that have been around for years, having already raised significant capital with huge early-stage growth and valuation, which has already accrued to the early private investors.
Today’s IPO of Lyft (LYFT) is a prime example; the company is widely known, and this is the first chance investors will be able to use the public markets to invest in the hot sector of ride sharing.
As of this writing, Lyft is set to issue 32 million shares at $72, raising some $2.4 billion and valuing the company in excess of $23 billion. Some are expecting shares to pop above $100 once trading commences. Do not buy into this!
This company has already raised over $4 billion from venture capital and private equity firms, so they will be minimum of a 500% return right off that bat.
While Lyft may have doubled its revenues to $2.1 billion, its losses also grew by 35% to a staggering $990 in 2018. The company’s own prospectus says there “is no clear path to profitability.”
And with Uber expanding quickly and moving more aggressively into other areas such as food and cargo delivery, investing more in self-driving cars, will ultimately be necessary for the business model to be profitable. And once self-driving cars become a reality, that will allow new competitors, both legacy businesses from automakers to new entrants, to enter the market with a lower cost structure. I think Lyft shares ultimately crash.
A different company in ‘sharing economy’ for which I have a better outlook is Airbnb. The home/apt/room sharing platform is expected to go public sometime in the second quarter by selling some $1.5 billion in stock with an overall market valuation north of $30 billion.
One reason for the small issuance relative to it’s the market cap is Airbnb is considering a “direct listing,” the shares being sold are coming from insiders cashing out rather than raising capital for the corporate coffers. I’m okay with that, as the business is very asset light with little overhead. It’s cut out for Wall Street and the underwriting fees.
Airbnb is profitable, revenues are said to be growing by 35% annually, and it has a tremendous lead in the business model in which scale and the network effect are crucial and create a natural moat to competition.
Of course as a trader, what I’m really excited about is once these newly minted public shares get options listed, they are likely to have high volatility and active trading as bulls and bears battle it out in the short term, regardless of the long-term outlook.
About the Author: Steve Smith
Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...