NEW YORK: Companies making their debut on the US stock market are getting a rough welcome, especially if they are losing money, casting a shadow over the calendar for initial public offerings for the rest of the year.
The surprise postponement of the WeWork IPO has underscored how confidence is eroding in the market both for companies looking to raise capital and investors.
A more discerning market for initial public offerings continued to punish Peloton Interactive Inc. on Friday, a day after it began trading. Shares of the fitness startup closed down 2 percent at $25.24 and are now off 13 percent from their IPO price. The company is now trading 15 percent below its Wednesday IPO price.
Before trading began on Friday, five of this year’s eight deals of $1 billion or more were trading below their IPO price, according to research firm Dealogic. On a broader scale, only about 27 percent of the 112 deals of $100 million or more were trading below their IPO price.
Venture capital firms and other backers of many of these high profile “unicorns” — companies valued at $1 billion or more in the private market — had a higher tolerance for the path to
profitability, but eventually they wanted to monetize their stakes.
In the past, public market investors have typically expected companies to become profitable within 18 months or so of an IPO. This timeline has been relaxed with money managers eager to add businesses with fast-growing revenue to their portfolios.
Recent deals, however, suggest an uncertain economic outlook is pushing investors to be more selective about which loss-making companies they are willing to back.
Peloton reported rapid top-line growth of 110 percent during the fiscal year that ended June 30. But the company also showed negative operating leverage, with operating expenses surging 147 percent over the prior year.
Loss-making teeth-alignment company SmileDirectClub this month became the first US IPO in three years to price above its target range and close down on its first trading day, according to research firm Renaissance Capital.
SmileDirectClub is the worst performer among $1 billion-plus IPO deals, with its stock down 43 percent since its debut earlier this month, according to Dealogic.
The best performer in that group is social media company Pinterest Inc, whose shares are up 39 percent since their April debut. Revenue at Pinterest surged 58 percent to $463.2 million in the first half of 2019. Net cash used in operations during that period narrowed to $16 million from a year-ago $29 million, according to Pinterest’s financial statements.
Shares of Beyond Meat Inc, which came to market in May in a small $277 million deal, have surged more than 500 percent since the IPO. The company’s operating expenses more than doubled during the first half of the year, but that was outpaced by top-line growth that more than tripled.
Meanwhile, the average IPO return in 2019 was now about 6 percent at the end of trading Friday, down from more than 30 percent at the end of June and more than 18 percent about two weeks ago.
In the US, much of the attention in the third quarter has focused on a deal that failed to come to fruition — the planned IPO of WeWork parent We Company.
The company had aimed to launch its IPO earlier in September, then postponed plans to list until later in 2019, before replacing its chief executive officer and saying it was reviewing its timetable to go public.
Endeavor Group Holdings, an entertainment and talent agency company backed by Hollywood power broker Ari Emanuel with a track record of losses, made a last-minute decision to abandon its IPO due to the tough market conditions.
Home rental giant Airbnb has said it plans to list its shares in 2020 but provided no details and is widely expected to do a direct listing to go public. In a direct listing no new shares are created and investors can sell their stakes while saving millions of dollars in underwriting fees.
This month the company said it raked in more than $1 billion in second-quarter revenue.