After first-time listings let investors down last year, firms planning their debuts should expect more scrutiny
2019 turned out to be one of the biggest years for the U.S. stock market, as both the S&P 500 and Nasdaq indexes surged by over 30% year-on-year. A large part of that performance was thanks to the ever-reliable tech sector — though one corner of the space fell far short of expectations.
“In a year that saw the Nasdaq jump 35%—its best performance since 2013—most tech companies that went public closed 2019 below their first-day opening prices,” wrote Wall Street Journal contributor Dan Gallagher.
Among the tech firms that made their maiden forays into the public equity space last year, at least nine finished 2019 below their IPO prices — a concerning statistic, Gallagher noted, given that IPO prices are conservative estimates designed to maximize the likelihood of gains. Those included unicorns whose private valuations exceeded US$1 billion; Uber, Lyft, and Slack ended the year down by 40% on average from their first-day opening prices.
The numbers indicate a growing leeriness among public investors when it comes to private-market valuations, which critics say have tended to be inflated. A prime example of that was the high-profile debacle involving WeWork, whose parent company aborted a planned listing in mid-September after its disclosures revealed shaky finances and an unorthodox management structure.
“The move cast a notable chill over the IPO market, giving public investors further cause to rethink the business models of companies already valued in the billions but still burning cash,” Gallagher said.
Citing Dealogic, he reported that only seven U.S.-based tech companies have gone public since the botched IPO of WeWork’s parent firm, compared to 20 that launched prior to that. Among those 20 firms, 16 declined by an average of 23% in market value by the end of 2019. Over that same period, the Nasdaq Composite was said to have risen by 10%.
“In other words, the current bull market hasn’t translated into irrational exuberance for new tech issues,” Gallagher said. “That should be a warning sign for others lining up for a run at the market this year.”
Among those public-market aspirants is Airbnb, which was reportedly valued at US$31 billion in its most recent VC round in 2017, according to Pitchbook. The home-rental company reportedly lost over US$306 million in Q1 2019 — not unusual among the most valuable US startups in recent years, but likely not good enough to appease investors in 2020 and beyond.
