Buying shares in a company that has undergone an initial public offering (IPO) is usually an exciting time for all involved. The company has grown and showed institutional investors that it is worthy of their cash. The investors who have supported the company throughout its lifespan can cash out. Then it is time for the open market where you and I can get a taste. But, it seems the latest crop of IPOs coming from the US is not living up to the hype, leaving a sour taste in many mouths.
The latest IPO to flop is Peloton. The company is a connected-fitness start-up, which makes indoor bikes and treadmills and streams virtual exercise classes. It is popular among the fitness geeks in gyms across the UK and US. Initially, Peloton was seeking a public valuation of about $8 billion (£6.5bn) – roughly double the $4bn it was privately valued at in August 2018. One has to ask: how does that actually happen?
Peloton then more than doubled its sales to $719 million in the year to 30 June. However, its operating losses roughly quadrupled to $202m in the period. Even with its rapid sales growth, investors may have shied away at valuing the company at more than 11 times its revenue. Go figure.
Peloton kicked off its IPO at $29. When it hit the markets it dropped to $27, finally ending its IPO week at around $25. Down 13 per cent. It seems that investors who have recently bought shares have lost out on all the marketing and selling of this company at IPO.
But the company numbers show the real picture. Even with sales topping out at $950m, its losses grow and grow. In effect, the more it sells the more it loses. This is a worrying trend that is sending shockwaves across Silicon Valley and San Francisco as landlords and start-ups alike worry about future growth and sustainability.
Yet, a company like Peloton attracts a bold market cap of $7bn, demonstrating that there is even more money available for it to burn on a potentially flawed business model. Uber, the ride hailing app, has also disappointed. Shares have fallen more than 30 per cent since Uber’s IPO in May. Revenues grew 17 per cent to $6.3bn in the first half of this year, according to its latest earnings report. Growth in sales appears to be the vanity metric that these tech unicorns are using to makes headlines. It’s a headline that many a company has used in the past to say to the world “all is okay”, but has then resulted in disaster.
Uber has posted a net loss of $6.3bn – a sharp downward swing from its net income of $2.9bn in the same period last year. The group’s market capitalisation of $53bn values it at close to five times revenue and more than 50 times net income last year. This seems a fairly aggressive valuation by any standard. Again, it appears the more it sells, the more it loses, but the markets still have faith?
So the same story goes on. Lyft, another ride hailing app, had an IPO price of $71 in April. Its shares now sit at $40, down more than 40 per cent. The chart does not look good for anyone who invested on day one. Again, Lyft has revenues up 82 per cent to $1.2bn in the first half of this year. Again, net losses have rocketed to a four fold increase, coming out at $1.8bn. So, what does this all mean for the future of tech, IPOs and unicorns?
Maybe, just maybe, the market is now about to draw breath and take a closer look at the fundamentals of new listings. Investors want to see their share portfolios rising in this bull market, not dropping with IPOs that are laden with debt and burning cash as if there is no tomorrow. They are looking for profits, top leadership and governance and not simply gigantic, aggressive market capitalisations. Commentators across the financial press in the US are talking down these disruptive business models that are costing cash and not generating enough to make ends meet.
The question is at what stage will greed subside while common sense and arithmetic take over?
Jim Duffy MBE, Create Special