Uber and Lyft disappointed investors since they went public. But make no mistake: The market for initial public offerings is still red hot.
Some think it might be too hot.
That follows the phenomenal successes of plant-based protein company Beyond Meat (BYND), video conferencing firm Zoom (ZM) and online fashion retailer Revolve Group (RVLV), which is actually profitable.
Still to come, online pet supplies retailer Chewy is set to start trading Friday. The company, which is a spin-off from PetSmart, boosted the price range for the IPO on Wednesday. At the top end of its new range, Chewy would be valued at $8.4 billion, easily making it a so-called unicorn.
And the popular work messaging tool Slack will soon sell shares through a direct listing. It’s a move similar to what Spotify (SPOT) did when it went public, and will allow Slack to bypass the traditional process of hiring Wall Street bankers to sell new shares of the company to institutional investors. Slack is estimated to be worth about $17 billion.
The success of IPOs that are not in the highly competitive ridesharing business is a sign that investors are still hungry for new high-growth companies. But all that enthusiasm may not be warranted.
“People got spooked by Ube (UBER)r and Lyft (LYFT), but they are anomalies. They are losing so much money and they have no path to profitability,” said Duncan Davidson, founding partner at Bullpen Capital, an early stage investing firm. “Investors are being more discerning and that’s a positive.”
Uber and Lyft are the IPO exceptions, not the rule
Davidson said he thinks Slack should do well also, mainly because it’s focused more on big businesses and not the hyper competitive (and very price sensitive) average consumer.
But now some are worried the IPO market has swung too far in the wrong direction and has gotten overly frothy recently.
“It feels an awful lot like the late 1990s,” said Sean Brown, CEO of YCharts, a financial data research site. In the dot-com boom of the late 1990s, many unprofitable internet and tech firms flooded the public markets with new stock offerings.
Many younger investors didn’t live through that bubble and do not fully appreciate how similar things are now to 1998 and 1999, Brown said. They just see the strong sales growth for things like Beyond Meat and Slack – products they are familiar with – and think that they must be good companies regardless of the price.
“Memories have faded. A lot of people said they would never do this again,” Brown said. “But the demographics of traders have changed too. So there may not be any memories to fade. People are getting fooled into thinking that many of these unprofitable companies are fundamentally sound because they use them all the time.”
Investors buying IPOs have enjoyed soaring stock prices lately and could be setting themselves up for disappointment, he said.
Many high profile IPOs have flopped
YCharts analyzed the top 25 IPOs by market cap for each year during the past decade, and found that over the long haul, only 38% of them have actually outperformed the S&P 500.
But other experts think investors will continue to flock to new offerings.
Demand is strong for CrowdStrike, Zoom and other hot offerings in recent weeks, according to Scott Coyle, CEO and co-founder of ClickIPO, an app that allows individual investors to buy and sell shares of new stocks. He added that investors are lining up for Chewy and Slack as well.
Investors may still be rewarded by purchasing shares of new companies, said Tom Rice, a partner with law firm Baker McKenzie. The key, he said, is patience. After all, Facebook (FB) struggled for a few months after its heavily hyped IPO in 2012.
With that in mind, Rice thinks that investors may still be willing to line up to buy shares of other notable unicorns that could go public later this year or in 2020 – most notably Airbnb and WeWork.