It’s been a big year for IPOs, but it hasn’t been a kind one.
Ride-share startups Uber (NYSE:UBER) and LYFT Inc (NASDAQ:LYFT) made their public trading debuts in belly-flop style, and initial offerings from workplace collaboration tool Slack, connected fitness company Peloton Interactive Inc (NASDAQ:PTON) and online dentistry firm SmileDirectClub Inc (NASDAQ:SDC) weren’t prettier. But shared workspace darling WeWork never even got that far. In the span of a week, the parent We Company shed its CEO and scrapped its planned IPO, as the money-losing startup takes a critical look at its balance sheet.
Hollywood talent firm Endeavor also scrapped its IPO recently, just days before its planned debut, citing unstable market conditions. No doubt.
“The successful IPOs, this year, they’re a minority, at least percentage-wise,” says David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business.
Investors have been proceeding on new issues with ever-increasing caution, he says.
“The main determinant of which IPOs are likely to do well is whether the company expects to be making a profit within three years,” says Kass. “Investors are asking the question: What is the road to profitability for this company?”
In S-1 filings for WeWork, Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) that answer was nowhere to be found.
“If you don’t get to profitability, then your value is zero,” Kass reminds.
To see how choppy it’s been, look no further than the Renaissance IPO exchange-traded fund, (whose ticker is IPO). The ETF, which invests exclusively in stock debuts, has fallen sharply in the past two months, after a rather giddy start to the year.
It’s been a big year for IPOs – with more dollars raised in initial public offerings than in any year since 2014.
Of the 114 companies that have debuted on U.S. stock exchanges this year, 51 appear trapped in negative territory. Of course, it’s not all doom and gloom. For you glass-half-full types, 63 newly traded companies have traded above their IPO prices.
In fact, there have even been some highlights. In an interview with Smith Brain Trust, Kass shares three of the more notable successes in the IPO class of 2019.
Beyond Meat Inc (NASDAQ:BYND): The plant-based non-meat “meat” company made its hotly anticipated public debut on the Nasdaq in May. It closed its first day of trading at $65.75, or 163% above its IPO price of $25 – the best first-day stock performance in nearly two decades. “It’s done extraordinarily well,” Kass says. Its debut comes amid surging interest – from grocery retailers, restaurants and quick-serve chains for the new crop of vegan, plant-based foods that closely replicate the taste and look of beef. The stock was trading recently at $155, up nearly 520% from its initial price. “Beyond Meat is a very interesting company, and it’s benefitting in the market from its first-mover advantage,” he says.
Zoom Video Communications Inc (NASDAQ:ZM): Zoom went public in April and has impressed investors since. Zoom stood apart from the rest of its unicorn IPO class, debuting on the Nasdaq as an already-profitable tech company. The enterprise communications company that provides remote conferencing services using cloud computing continues to see significant revenue growth and operating margins, largely topping expectations. “Zoom has a subscription model, which is viewed as providing recurring income and therefore likely to succeed,” says Kass. It traded recently at $76, up more than 200% from its $36 IPO price.
Pinterest Inc (NYSE:PINS): The social media platform that allows users to view, save and share images by “pinning” them, has 300 million monthly users worldwide, and is just beginning to tap into its revenue potential. The San Francisco-based company isn’t yet profitable, but it’s revenue is climbing faster than its larger social media rivals, such as Twitter and Snapchat parent SNAP. “The company has been the first to do what they’re doing,” says Kass, and it lacks some of the controversies currently dogging its social media brethren. PINS has seen a slow ascent since its March IPO. It traded recently at $26, up from its $19 initial offering price.
There are two determinants to a successful IPO, says Kass.
The first is that earnings are visible, either current or demonstrably imminent. The second, he says, is that the IPO is fairly priced. “Overprice the IPO – or anything, for that matter – and it’s not going to prove to be a good investment.”