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After months of waiting, the 2019 IPO pipeline opened on Thursday with Levi Strauss. The blue jeans giant began trading on the New York Stock Exchange under the ticker symbol LEVI at $22.22 a share, after having priced its initial public offering at $17 a share the night prior.
Investors are salivating over the well-known names seeking to go public, from Uber to Pinterest to Airbnb. The IPO market has continued to rebound since February, with one IPO-dominant fund bringing returns of a whopping 32 percent this year, more than double those of the S&P 500.
However, there are a few warning signs ahead:
1. The pipeline is getting ever larger
Renaissance Capital, which tracks the IPO market, counts 37 companies in registration targeting $10 billion of proceeds. But that’s just the beginning: Renaissance has 234 companies targeting 2019 IPOs with valuations of nearly $700 billion, with a strong possibility that 2019 will be a record $100 billion year for IPO proceeds, passing the 2000 record of $96 billion.
But there’s a simple problem: Who’s going to buy all this stuff?
“We are concerned about how the public markets will absorb all this issuance,” Kathleen Smith from Renaissance Capital told CNBC.
Her point is that the market is very different than it was 20 years ago. There are fewer individual investors. Many don’t even have brokerage accounts. They have financial advisers who do asset allocation using index investing and ETFs. These financial advisers often aren’t even stock pickers and don’t follow the IPO market. They are asset allocators.
“The era when your broker called you up and said, ‘We’ve got a hot deal for you,’ is mostly over,” Smith said.
2. There may be a disconnect in private valuations
“It appears to us like private valuations are very high,” she told CNBC.
Sure looks that way with Lyft: the last round of funding was $15 billion, and now the ride-hailing company is reportedly trying to get $23 billion for its March 28 launch. “We have a hard time coming up to that number,” Smith said.
Same with Uber: The last funding round for the ride-hailing rival was $76 billion, but the talk is they could try to get as much as $120 billion.
3. Low quality, higher prices
While early IPOs with reasonable valuations (Levi Strauss) might do well, the broader worry is that as the number of IPOs increase into 2019, lower quality companies will be coming and there will be less pricing discipline. That’s when we could see problems: “That’s how the market could roll over. In IPO land, the market builds up a head of steam, and then everyone loses pricing discipline,” Smith said.
4. Too much supply
The tidal wave of offerings could take investment away from the broader equity market and slow down the rally. Several traders expressed this concern, and on the surface it seems to make sense. There’s only so much money out there invested in public markets. But is a $100 billion investment in IPOs, which is the top end of the expectations, really enough to slow down the stock market?
Smith doesn’t think so: “Our studies show that early in the IPO market recovery, returns are typically good for investors because the issuers will be higher quality companies offered at reasonable valuations.” She cited Levis Strauss as a good example.
And think about this: Alibaba was a huge deal, and it didn’t kill any rallies.
Regardless of the concerns, Wall Street is excited that a major part of the capital markets business is finally starting to function after a four-month hiatus.
Big IPOs waiting in the wings:
- Uber $76 billion
- WeWork $47 billion
- Palantir $41 billion
- Airbnb $31 billion
- Pinterest $12.3 billion
- Robinhood $5.6 billion
- Peloton $4.1 billion
- Postmates $1.9 billion