IPO activity softened in 3Q, as the number of IPOs dropped more than 45% from the previous quarter and investors became more discerning. Indeed, the ratio of IPOs with positive first-day returns dropped to 2:1, compared to 2.5:1 in the prior quarter.
Overall in 3Q19, 36 companies went public, down almost 50% from a robust 2Q, when 68 companies launched. The secondary market also slumped somewhat, with a 13% decline in issues quarter over quarter. We note, though, that 2Q19 was a bit of a snapback from an extraordinarily weak 1Q19, during which the U.S. government and the Securities and Exchange Commission essentially shut down and issuance activity ground to a near halt.
There were bright spots in the quarter. Investors jumped for information technology companies such as Medallia Inc. (MDLA, which opened 62% above issue), Dynatrace Holdings Inc. (up 59%) and the Unicorn companies Datadog Inc. (DDOG, up 49%) and CloudFare Inc. (NET, up 20%). They also aggressively bought into Healthcare companies such as 10x Genomics (TXG, up 38%), Springworks Therapeutics (SWTX, up 36%) and Satsuma Pharmaceuticals (STSA, up 27%). They also snapped up companies at the intersection of Healthcare and Information Technology, such as Phreesia Inc. (PHR, up 49%) and Health Catalyst Inc. (HCAT, up 44%).
The stock market environment remained stable in 3Q. On average, volatility was similar in the quarter to 2Q19. The Federal Reserve, having turned neutral in 1Q, began to ease in 3Q as it turned its focus toward stubbornly low inflation. Brexit remains an issue, as do trade wars (China) and geopolitical threats (Iran). Despite it all, the S&P 500 rallied above 3,000 in mid-September before succumbing to a bit of profit-taking and window-dressing at the end of the quarter.
As mentioned earlier, not all of IPOs that did come out in the quarter were well received. Following a trend that began in 1Q with Lyft Inc. and continued in 2Q with Uber Inc., unprofitable companies that venture capitalists may have loved a few quarters ago -- such as Peloton Inc. (PTON) and SmileDirectClub (SDC) – opened below issue and continued downward.
As well, The We Company (formerly WeWork) withdrew its IPO altogether after valuation, profitability and corporate ownership questions were raised. Finally, Chinese stocks, which had been darlings in 2018, also fell out of favor (perhaps due to the trade wars). Wanda Sports Group Co. Ltd (WSG) and DouYu International Holdings Ltd. (DOYU) both failed to close above their issue prices on their first day of trading.
Looking into 4Q19, we think the market for IPOs will pick up a bit, though seasonal factors typically emerge late in the quarter. On the positive side: economic growth, led by the employment environment, appears solid at around a 2.0%-2.5% rate; and corporate earnings are expected to grow at a mid-to-high single digit rate as the dollar stabilizes. The IPO pipeline is down slightly from recent quarters, with about 88 companies having filed with the SEC. But there are a number of interesting recent filings, such as non-opioid pain company Centrexion Therapeutics Corp. and IT company CloudMinds Inc.
We also look for corporations to continue pruning their business portfolios and raise assets through the public markets. As an example, Danaher Corp. spun off its dental business Envista Holdings Corp. in 3Q. Glaxo SmithKline has plans to spin off its consumer healthcare business, which it has grown through a joint venture with Pfizer Corp., and General Electric has announced that it is considering spinning-off its healthcare subsidiary in an IPO. Eaton, Ingersoll-Rand and Ecolab may also look to the IPO markets for divestments as they focus on core capabilities.
There are additional blockbuster Unicorns in the pipeline, including JUUL Labs, which has been valued above $50 billion; and Stripe, a credit card processing company serving websites, which has been valued at $22.5 billion. Of course, these companies now know they should be showing profit projections and offering better ownership terms during their road shows.
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, a clean balance sheet, brand names, attractive industries,
and strong management/ownership.
Data sources: Bloomberg, Triad Securities. Recent Prices as of 7/1/2019
Table 2 features the Argus Top 20 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, a clean balance sheet, brand names, attractive industries, and strong management/ownership.
Table 3 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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