Historically, the initial public offering (IPO) of stock from a much talked about new company has helped add pizzazz to a trading calendar while giving the overall market a positive boost. However, last week exercise-bike startup Peloton Interactive Inc. saw its shares fall almost –13% from its Wednesday IPO price. Also, office-space provider WeWork scuttled its announced IPO along with ousting its co-founder and CEO Adam Neumann. These news items are in the wake of the very underwhelming stock performances from popular ride-hailing companies Lyft and Uber following their much-anticipated IPOs earlier this year. Do these well-publicized IPO belly-flops portend bad news for the broader equity markets?
Not necessarily. According to Barron’s, there have been 114 U.S. IPO pricings in 2019, so far 63 (or 53%) have had positive returns as of Friday’s close. The chart below gives a sample of some of the prominent companies that have done an IPO this year and their vastly differing performances since their first offering. It is important to emphasize that the chart is not an endorsement of any particular stock, as we print on every one of our monthly factsheets— PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. However, the chart does demonstrate that the market has not been consistently pessimistic towards new stock issues.
The notably negative reactions to certain new stocks may just be a sign that the public financial markets are doing their job. In these cases, it is important to separate a company’s service or product from its financial health. A company that we may find delightful to deal with as a customer can be dreadful to deal with as an investor. Ultimately, a business has to provide a reasonable path to future profitability for ownership shares to be valuable. In recent years, many private companies have been able to grow large and popular with the promise that they can dominate a particular market by way of a fancy software platform, network effects, or a charismatic, visionary founder. Yet when they receive public scrutiny, stock analysts and investors notice high debt loads, weak corporate governance, fierce competition, and unrealistic assumptions about future profits. Of course, these companies can always prove their doubters wrong as many have done in the past, but it is a sign of strength that there are so many doubters in the public markets that don’t fall in love with the glamour of every hot new stock offering.