After yesterday’s disastrous IPO from King Digital Entertainment PLC (KING.K) (down over 15% after the first day of trading), thoughts of another IPO bubble are creeping into the minds of analysts, and investors. The fear is that the markets are approaching the same levels as the dot com boom, and the recent performance by KING might be the needle that popped the proverbial bubble.
Over the past three years we have seen IPO’s increasing year over year; in 2013, there were 178 companies filed, raising $41.3 billion, in 2012, there were 102, raising $35.1 billion, and in 2011 there were 97 total IPO’s, raising $28.7 billion. In the final three quarters of 2013, there were 50 or more IPO’s each quarter, which has not been seen since 2000.
For 2014, there have been just over 50 companies, so far, that have gone public in 2014; with the most coming from the Health Care Industry (almost half), and the Technology being the second most.
Performance
The chart (chart 1) below compares the S&P 500 with the two major IPO ETF’s; Renaissance IPO ETF, and First Trust US IPO Index Fund. As you can see, both ETF’s have kept pace with the S&P 500 Index over the past 4 months (First Trust has been mirroring the S&P for more than a year), but in the past month there has been a significant divergence from the S&P 500 (chart 2)
This change, plus the recent beating KING took yesterday, has analysts worried about the future growth of IPO’s.
According to Renaissance Capital’s Kathleen Smith (Principal of Renaissance Capital) “We see signs of a bubble, but not nearly what we saw in 1999-2000.” She went on to say that we are in the “Seventh Inning” of the bubble. She concluded by saying, “We are at points in the market that are definitely frothy. Investors have been outperforming the overall market in post-IPO trading, and that’s why we have such an exuberant market right now.”
Recent IPO’s
Not all IPO’s are failing like King Digital Entertainment; for example, yesterday Nord Anglia Education offered an initial price of $16.00, and is currently trading at $19.25 (a 20.31% increase). For that matter, of the seven most recent IPO’s 5 out of the 7 are showing double digit gains from their initial IPO after a few days of trading with the other two showing single digit losses.
Today’s IPO’s
Three companies debuted with their IPO’s today; TriNet Group Inc. , Applied Genetic Technologies Corp. , and Square 1 Financial Inc. .
First, TriNet Group is a payroll services company, with an initial IPO of $16.00. The initial offer was for 15 million shares. As of 1:30 p.m. today, TriNet is up over 17%, currently trading just under $19.00.
Second, Applied Genetic Technologies Corp , is a pre-clinical-stage biotechnical company that uses a proprietary gene therapy for patients with severe inherited orphan diseases in ophthalmology (eye diseases). Their initial IPO was priced at $12.00 with 10 million shares available. Currently, Applied Genetics has no products in clinical trials. As of 1:30 p.m. today, Applied Genetic is up over 23%, currently trading just below $15.00.
Finally, Square 1 Financial Inc. , is a bank that provides banking and financial products and services for Venture Capitalists, the Entrepreneurial community, and private equity firms in the U.S. Their initial IPO price was $18.00, with 5.9 million shares available. As of 1:30 p.m. today, Square 1 is up over 11%, currently trading just above $20.00.
Mixed Bag of Data
With the three IPO’s for today experiencing double digit growth in their first day of trading, the doom and gloom of IPO’s might be overblown. It appears as though the perceived needle that popped the bubble , might have just an anomaly due to company specific issues.
Bottom Line
In a recent discussion regarding IPO’s in 2014, Chief Equity Strategist John Blank of Zacks Investment Management, summed up the issue very nicely. “Is the IPO market overheating? Given the share prices in the publically traded market, and the amount of cash piling up on corporate balance sheets, no. Does it seem like an anomaly? I do think the last six years have created this sense of siege. An IPO is hopeful and optimistic. That is a good sign. And the siege mentality could slowly lift with it.”
So basically, the IPO market is not crashing, but like all other investment vehicles, you need to make sure that the companies that are filing IOP’s have positive fundamentals, and show potential for growth. Two things King Digital Entertainment did not prove before their IPO yesterday.