It is finally about to happen! After weeks of speculation, guesses, and conspiracy theories, Saudi Aramco’s initial public offering (IPO) is scheduled to begin trading soon. By selling just 1.5% of the company, the Saudi Arabia-owned crude oil juggernaut will receive a valuation of $1.7 trillion, which will make it the world’s largest IPO. The stock is already over-subscribed at home, but foreign investors do not have an appetite for a little bit of the crude bubbly. One reason could be IPO fatigue, especially with the kind of year the market endured.
Class of 2019 Graduates
After a couple of down years for the IPO industry, it was thought that some of the hottest companies in the United States today would toss a lifejacket for investors underwater in their investments. Uber, Lyft, Pinterest, Slack, and WeWork (the office-sharing company withdrew its IPO) were supposed to save us. Instead, Uber is down 12%, Lyft is up just 1%, Pinterest is down 32%, and Slack is 17% in the red from their IPOs. Even the plant-based Beyond Meat, which had surged 50% from its IPO price, has been carved in half.
Hey, it is not all doom and gloom, though. Peloton, after bearing the brunt of an oversensitive social media mob taking umbrage at a television commercial for its exercise bike, has been one of the surprising bright spots. Even with the 7% loss in the first week of December, shares of the money-losing venture are still up 38% since going public.
That said, the entire situation could worsen over the coming months as the lock-up period – stocks that are eligible to be sold on the open market – of these IPOs are coming to an end. This could add pressure to companies that have already been struggling in their post-IPO sessions. It might also give some future IPOs some consternation about going public.
But why is this happening? Well, it turns out that stocks can no longer rely just on good faith. They need to begin generating a profit.
Goldman Sachs recently published a report that found businesses that went public this year are projected to produce the lowest profits of any year since the dot com bubble. In fact, according to the Wall Street titan, just 24% of IPOs in 2019 will post positive net incomes, which is the smallest percentage in 20 years. With interest rates at historic lows and the Federal Reserve pumping the market with cheap money, these companies can survive the bleeding a little longer.
According to a Bloomberg analysis of listings worth $100 million or more, unprofitable IPOs have raised the most cash of any year since the dot com era. Despite the poor returns of late, investors are scooping up IPOs in the hopes of getting served a plant-based-style burger. Can they be perpetual bulls? If the Fed keeps the spigot running, Wall Street will be there to chug it down.
Bill Gurley, a partner at venture firm Benchmark, recently told CNBC that the IPO process was a “bad joke” for Silicon Valley. He may be right, considering the lackluster performances of these stocks.
Will the Class of 2020 Get Left Behind?
Either 2020 will be the start of something new or it will replicate 2018 and 2019. The experts are prognosticating that next year will see “global IPO activity pick up.” Forbes magazine is anticipating as many as 40 to 50 IPOs. Right now, the talk on the Street is that Airbnb, Hemptown, Postmates, Robinhood, and Casper will be the biggest businesses to go public. Like their predecessors, many of these companies have already recorded disappointing quarterly results; Airbnb reported first-quarter losses and Postmates published steep third-quarter declines. HempTown, a company that specializes in hemp production, might be one of the few breakout stars of next year’s class due to a legislative push to ease regulations on hemp in the U.S., thanks to Sen. Mitch McConnell (R-KY).
With Plenty of Money and You
It has been quite the year for American financial markets. Across the board, nearly every asset class performed well, from the U.S. dollar to precious metals to energy (except natural gas). If you put money in the stock market – whether it was an exchange-traded fund (ETF) or Treasuries – you likely enjoyed a return on your investment. Considering how the Dow Jones, Nasdaq, and S&P 500 each recorded all-time highs in 2019, it would seem counterintuitive that IPOs would drown in an ocean of red ink. But here we are. Unfortunately for the IPO class of 2019, it was the worst of times – can 2020 be an improvement?
Read more from Andrew Moran.