IPOs in 2020 – is this the real life, or is this just fantasy?
Initial Public Offerings (IPOs) must be the purest of all activities in the capital markets. A well constructed company with a bright future comes to market in search of capital, liquidity in its stock and prestige. The top execs can taste their pending wealth and bankers fight over each other to advise on the listing and build the book.
Investors scramble to get involved, while institutions and bankers play off each other and scream over the phone: “we’ve known each other for years – we need to get in on this stock!”
The company lists and the share price rockets as the investors who only made the B-roll have to put in bids to secure stock from the fortunate view who participated in the primary capital raise.
The headlines gush over the new listing, the execs buy new cars and the first investors bank a solid day-one profit. Bankers and traders go home for a glass of something expensive and come back to do it all again tomorrow.
Is this the real life, or is this just fantasy?
Freddie Mercury and friends probably weren’t singing about the Snowflake IPO, but the words would be highly applicable. The software company debuted on the market last week in the largest software IPO of all time.
The company listed at $120 per share, but there was a delay for several hours as bankers tried to make a market. There were simply no sellers at that price. Eventually trading kicked off at $245 per share, valuing the company at $75bn.
Not bad for a company that raised capital as recently as February 2020 at a valuation of a just $12.4bn. With rolling 12-month revenue of a touch over $400m, that’s a truly incredible revenue multiple of nearly 190x by the time trading settled down.
Warren Buffett, the Chief Value Investor of the World, even got a slice of the action. Berkshire Hathaway bought a stake from one of the founders, albeit at the $120 listing price. Still, that’s a trailing revenue multiple of over 90x – not exactly Buffett’s usual game.
Naturally, the story behind tech IPOs is always about forward multiples, not trading multiples. Q2 revenue growth was 121% year-on-year so the trading multiple should “unwind” quickly, although it’s still a steep valuation for any company.
IPOs don’t follow a script
Timing of an IPO is everything.
Snowflake got it right, listing into a market that has been frothing for tech, assisted by everything from lockdown tech profits and excess liquidity through to whale traders and Robinhood trader price support as we highlighted in our last article. Even the recent Nasdaq sell-off did nothing to dampen Snowflake’s spirits.
Visa was another company that got the timing just right. Listing in March 2008 in the sunset months of a bull market, Visa raised just under $18bn in the largest IPO in U.S. history at the time. It listed at $44 per share but there was a 4-for-1 stock split in 2015, so if you bought one share in the IPO you would now own four. The current share price of $205 means your $44 would now be worth $820, a casual 1,760% return on investment excluding dividends.
Facebook’s IPO is well worth touching on as an example of a listing that initially burned investors.
Facebook was started in 2004 as “TheFacebook” and reached 6 million members by the end of 2005. The growth was insane and just kept going. Facebook was offered at $38 per share in the IPO in May 2012, marking the start of the modern FAANG era. At the current share price of $255 per share, your capital return would be 571% in 9.5 years.
However, within a few months of the IPO, Facebook was trading at below $18. Tech sceptics became insufferable at the water cooler, telling anyone willing to listing that these companies are all garbage. It took 16 months for the share price to recover to the IPO level.
The rest, as they say, is history.
What’s coming up this year?
Airbnb wanted to go public back in March, but then lockdown happened and the hospitality industry collapsed. Airbnb can thank all its lucky stars that it didn’t go public just before the craziness, or the share price would’ve been sold into oblivion and may not have recovered.
As luck would have it, the hotel industry is achieving reasonable occupancy rates again and investors are hot for tech companies. The timing is ripe for Airbnb to come to market and write off the past 6 months as a bad experience. IPO paperwork was apparently confidentially filed in mid-August, which means the IPO should land this year.
Because of its variable cost structure, Airbnb would’ve been shielded on the downside of lockdown and should rebound faster than other hospitality businesses. It could be an interesting IPO.
Another one to watch is Ant Financial, formerly known as Alipay and backed by the Alibaba Group. The company may raise as much as $30bn, which would make it the world’s largest-ever IPO, beating Saudi Aramco that raised $26bn when it went public in 2019. Initial indications are positive, with reports suggesting that major Asian institutions like Temasek will support the IPO.
Ant will not list in the US, planning to list on the Hong Kong Stock Exchange and on the Shanghai Stock Exchange’s Star board, the Chinese equivalent of the Nasdaq instead. One can almost guarantee that there will be American traded instruments (like American Depository Receipts) that enable investors to take a view on Ant.
Both Airbnb and Ant continue to face regulatory hurdles as industry-systemic players in an ever-changing environment. They are two of the biggest names coming to market this year, but there will likely be a raft of IPOs that tap into a market that is itching for new counters to invest in.
Look out for the SPACs as well. These are cash shells that are pre-funded by investors before doing any deals. Companies can effectively reverse list into a SPAC, circumventing many of the onerous IPO requirements in the process. It’s a route that has grown in popularity significantly this year, especially in the US.
The next decade of global growth is upon us and we will keep a close eye on how the newest market entrants perform.
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