What to Expect for IPOs in 2016
Springtime brings growth to all corners of the continent, and many investors hope it will break a deep freeze on Wall Street. Not a single initial public offering took place in January, making it the slowest start for IPOs since 2008.
If there were such a thing as an IPO groundhog, forget coming out to see his shadow -- he'd still be burrowed deep in some trading pit.
"The IPO market is absolutely dead right now," says John Divine, assistant editor at InvestorPlace.com. "As always, there are companies waiting in the wings to go public, but there haven't been many to make the leap this year."
The reasons lie not just in stock exchanges here at home, but halfway around the world as well. "While markets have seen a nice little bump from their February lows, I think it'll take a more sustained rally -- and some level of reassurance that China has reached a level of stability -- before Wall Street will really have the risk tolerance to support a robust IPO market," Divine says.
"The value of a company's equity is related to the cash it can generate now and into the future," says Bob Blee, head of corporate finance at Silicon Valley Bank in Palo Alto, California. "Changes in the world's economic outlook create uncertainties in a company's future cash flows and add another layer of complexity to the valuation analysis."
If the situation in China stands to rattle American companies hoping to to go public, imagine what it's doing in the People's Republic.
"It will be interesting to see if the deal flow of tech companies out of China will pick up at all," says Alan Seem, a partner at Shearman & Sterling in Menlo Park, California. "There was an expectation that the Alibaba (BABA) IPO would jump-start new interest in China IPOs, but that never really played out." In fact, Alibaba's record-shattering IPO of $25 billion has been a bust so far, with the stock trading nearly 25 percent lower now than on the first day of trading.
To hear many a market watcher tell it, IPO this year might as well stand for Ignore Precarious Opportunities.
"Based on the performance of IPO companies in 2015, I personally would not invest in an IPO," says Chris Hewitt, a partner in the Tucker Ellis law office in Cleveland. "Almost 77 percent of companies that went public in 2015 have stock prices below their IPO price, and the overall return for IPO stocks was 2 percent in 2015."
Hewitt cites the example of Shake Shack (SHAK), which went public in January 2015. A dynamic performer through May, SHAK stock has fallen more than 25 percent in the last six months, now sitting below $36 per share.
The potential public debut of some companies still generates investor exuberance. "Some big-name companies with huge valuations in sectors tangential to tech, such as Uber, Airbnb, and Snapchat, are on the sidelines," says Jeffrey Zucker, an angel investor and co-founder of Green Lion Partners in Grand Junction, Colorado. "But they're unlikely to go public until the market is more stable."
Nor are any of those companies close to a slam dunk. Uber betters, take note: the app-powered passenger pickup service has growing competition from companies such as Lyft. There's even a coinage for copycatting in this sector, "Uberification."
"Square (SQ) is a good example of the hype attached to tech IPO," says Gary Tsarsis, clinical assistant professor at the University of Pittsburgh's Katz Graduate School of Business. "They had a very good product about three to four years ago. It was cutting edge, new, simple to use and gained a good word-of-mouth following. But during the past several years, other companies have come out with similar technologies, thus reducing Square's competitive advantage."
So how does an everyday investor know when it's time to take an IPO dive? "Quite simply, they don't," says Gregory Sichenzia, a founding member of Sichenzia Ross Friedman Ference, a securities law firm in New York. "IPO returns in 2015 and the first quarter of 2016 were negative. Investors with a high tolerance for risk, and a fundamental understanding of the market or markets they invest in, are better suited in evaluating IPOs than those your average investor."
"IPOs in general tend to be a higher on the risk curve -- and this is especially true with tech and biotech companies," says Neil Dhar, U.S. leader of the capital markets practice group of PricewaterhouseCoopers. "However, in an environment with low interest rates, those companies are of more interest to investors because of higher yields associated with them."
As for mitigating risk, Dhar says: "Companies with good growth stories, strong management teams and fundamentals will always do well in the marketplace."
At least that's how it's supposed to work. "Box and Etsy are prime examples of highly anticipated, can't-miss technology IPOs from 2015 that, well, missed," says Jeffrey Goldberger, managing partner of KCSA. And if 2016 has produced a dearth of tech IPOs, he points out a good reason: Many companies "have attracted a huge amount of private capital, which in turn provides these companies a longer runway to grow their businesses without having to rely on the public markets to fund their growth objectives."
Nano Dimension (NNDM) is one tech company that just bypassed the traditional IPO route. The Israel-based 3-D printing electronics company utilized a "private investment in public equity" deal. Accredited investors can purchase discounted shares, which in turn provides funding.
Nano Dimension started trading on the Nasdaq composite on March 7. "For us, the timing of our Nasdaq listing could not be more optimal," says CEO Amit Dror. "It's a place for mature companies, and even though we are pre-revenue, we believe there's an opportunity for scaling up."
Meanwhile, there's no such thing as the promise of spring in the Land of IPO, though it's always possible things will heat up later in the year.
"The IPO market has nearly evaporated; why go public in an extremely volatile market driven by a slower-demand environment?" says Rebecca Corbin, founder and managing partner at Corbin Perception, an investor relations research and advisory firm in Hartford, Connecticut. "Companies are likely waiting for the dust of earnings to settle and broader macro factors to abate. You probably won't see a robust IPO market until broader investor sentiment improves."
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