Despite a strong domestic economy, IPO activity cooled off in 4Q as investors focused on slowing global economic growth, Federal Reserve activity and President Trump’s trade policies. In this difficult environment, companies decided to postpone launching initial public offerings.
Yet a few Unicorns emerged last quarter, despite the challenging backdrop. And more – including some of the most eagerly awaited, such as Uber Inc., Lyft and Airbnb – have taken steps to become public in 1H19.
Overall in 4Q18, 42 companies went public, down about 30% from the previous quarter and from the year-ago total. Meanwhile, the number of secondaries issued was down about 15% compared to 3Q and more than 25% year over year.
Volatility in the U.S. equity markets in spiked in 4Q. Though payroll numbers were strong (suggesting solid economic growth) and corporate earnings advanced at a 20%-plus clip in the third-quarter reporting period, investors were concerned about the Federal Reserve and interest rates, as well as the Trump administration and tariffs. The VIX volatility index soared in the quarter, from 12 in September to 28 in late December.
The volatile economic and stock market conditions placed a cap on IPO prices in the quarter. We estimate that the ratio of IPOs that opened at prices above the issue price compared to IPOs that opened at or below the issue price was approximately 1.2:1, down from 2.4:1 in 3Q.
Some of the strongest performances, from a first-day performance perspective, were from companies launched by Goldman Sachs, JP Morgan, Morgan Stanley, Barclays Capital and BofA Merrill Lynch, including:
The designation of worst-performing IPO went to Mogu Inc. (MOGU), a fashion and lifestyle company that opened 14% below offering price. This offering was led by Morgan Stanley, Credit Suisse and China Renaissance Partners.
Chinese companies continued to access U.S. markets, but the IPOs from these companies did not have the same strong firstday performance as they did in 3Q. For example, in 3Q, Chinese companies such as Pinduoduo (PDD), LAIX Inc. (LAIX), 111 Inc. (YI), Qutoutiao Inc. (QTT) and X Financial (XYF), on average opened up 35% above issue price. In 4Q, companies such as Mogu Inc. (MOGU), the fashion and lifestyle company; Datasea Inc. (DTSS), a cybersecurity company; and TuanChe Ltd. (TC), an omni-channel automotive marketplace in China, on average opened 5% below their issue prices.
Unicorns continued to emerge. During 4Q, three Unicorns came public on U.S. exchanges. Moderna (MRNA), a biotech company, raised $600 million and is now valued at $4.8 billion, though the shares opened 4% below the issue price. Tencent Music Entertainment Group (TME), the Chinese music entertainment platform, raised $1.1 billion and is now valued at $20 billion; its shares opened 8% above the issue price. And Anaplan (PLAN), the software company, is now valued at $3.1 billion and soared 42% above its issue price on opening.
Looking into 2019, we think the market for IPOs is likely to pick up from the seasonally slow 4Q18. On the positive side: economic growth, led by the employment environment, appears solid; and corporate earnings are expected to grow at double-digit rates, as the dollar stabilizes and oil prices start to recover. The IPO pipeline remains robust, with about 165 companies having filed with the SEC and a number of interesting recent filings, such as Beyond Meat, a developer of plant-based “meats”; Caliburn International Corp., a leading provider of services to U.S. government agencies; and Virgin Trains, an express passenger rail system in Florida. We also look for corporations to continue to prune their business portfolios. As an example, General Electric has announced that it is preparing to spinoff its Healthcare subsidiary in an IPO.
More importantly, several blockbuster Unicorns have indicated that their plan is to come public in the first half of 2019. This list includes ride-sharing companies Uber, which could be valued as high as $120 billion; and Lyft, which was most recently valued at $15 billion. In addition, social network Pinterest, which has been valued at $12 billion, is reportedly exploring an IPO in April. Travel company Airbnb and workplace company Slack are possibilities for 2H19, though both have been exploring listing directly, like Spotify.
In the tables on the following pages, we highlight select companies that our team of analysts thinks may be poised to enter the IPO markets at potentially attractive prices.
John Eade, President, Argus Research
Jasper Hellweg, Security Analyst
Table 1 features the Argus Top 30 Promising Potential IPO candidates. This list has been selected from companies that have
already filed S-1s with the SEC. It is based on factors that Argus
believes are important for success in an IPO, including sales and
earnings growth, clean balance sheet, brand names, attractive
industries and current management/ownership. Stocks on this list
in our last report that debuted in 4Q included: Anaplan (PLAN),
which opened 43% above issue price; SI-Bone, which opened 40%
above issue price; Studio City International (MSC); which opened
32% above issue price; Allogene Therapeutics, which opened
22% above issue price; and Tencent Music Entertainment Group
(TME), which opened 8% above issue price.
Table 2 is our Top 40 intriguing venture-backed private companies, including the Unicorns. This list includes companies in
emerging industries such as Cybersecurity and Big Data analytics,
as well as companies whose investors include well-known groups
such as Kleiner Perkins and Andreessen Horowitz.
Source: www.sharespost.com; cbinsights.com; The Billion Dollar Start-up Club; www.techcrunch.com; www.crunchbase.com; www.wsj.com; www.bloomberg.com; www. fool.com; www.pitchbook.com; Argus Research.
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