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IPO Roundup: Noble Capital explains why it's time to be bullish — and bearish — about the IPO market

Investors have been let down time and time again this year, but the reason why is hard to pin down

Person burning a Post-it that reads 'IPO'
The underlying problem, as Noble Capital sees it, is two-fold: IPOs are going through at unrealistic prices, and focus has shifted to the short term

It’s no secret that 2019 has been a rough year for large IPOs. 

Investors have been let down time and time again as highly anticipated IPOs from companies like Lyft Inc (NASDAQ:LYFT), Peloton Interactive Inc (NASDAQ:PTON) and SmileDirectClub Inc (NASDAQ:SDC) all underperformed from the start or collapsed after a hot start. 

Others, like WeWork on Monday, have pulled their IPOs altogether, blaming the harsh market conditions for their trepidation to go public. 

On Friday, Noble Capital laid out the case to be bullish — and the case to be bearish — about IPOs going forward. 

Why be bullish

One the one hand, the analyst said in its note, that fluctuations in the IPO market are common and traders shouldn’t be scared off by economic conditions of the moment.

“The IPO market has always run hot and cold,” Noble said. “One need only go back five years to find articles written about the demise of the IPO market. The supposed demise, however, was followed by several successful offerings.”

It’s true, as 2014 headlines like “The IPO is dying. Marc Andreessen explains why.” and “IPO window is shutting, and that’s a good thing” make clear. 

“Many of the troubled IPOs are high-growth companies that have done well in recent years due to a strong economy,” Noble explained. “With the economy starting to slow down, expectations for these companies are being lowered. As such, weak performance of IPOs does not reflect a flawed market but merely one that is appropriately factoring in new global economic conditions.”

Investors have had a lot of negative news to factor in. The ongoing trade war between the US and China, for one, has the market fluctuating at the drop of a tweet, and just this week the Dow Jones Industrial Average saw a two-day selloff of nearly 850 points.

That said, high-growth companies can still succeed.

“Peloton, WeWork, Blue Apron, and Lyft saw rapid growth from disrupting the market with a better product,” Noble said. “However, this growth eventually slows if there is no innovation. This trend does not mean that the IPO market for all high-growth companies is flawed.”

Why be bearish

The underlying problem, as Noble Capital sees it, is two-fold: IPOs are going through at unrealistic prices, and focus has shifted to the short term. 

“Investors in private companies are reluctant to price follow-on offerings at prices below previous placements,” Noble said. “As a result, they (along with cooperative investment banks) often push IPOs through at prices higher than the market will bear. In the end, however, it is the market that ultimately sets a stock’s price, resulting in post-offering weakness.”

It wasn’t always this way. 

“During the tech bubble of the early 90s, it was not uncommon for managements to price IPOs with the expectation that the stock price would rise. The argument investment bankers gave to management was that a successful offering would help support future offerings even if it meant getting less than full price on the IPO. With management’s focus becoming much shorter, fewer management teams are willing to accept a lower price in exchange for future benefits.”

Noble's takeaway

On balance, the firm said, it’s clear things have gotten worse. The forces behind the negative shift, though, are murky. 

“Enough IPOs have faltered recently to count as a trend. Whether their weakness is due to economic conditions, private investors’ expectations, or simply a trend among a unique subset of stocks remains to be seen. The impact of recent weakness, however, is clear. Companies hoping to strike it rich by going public, such as Endeavor, are putting their dreams on hold.”

Contact Andrew Kessel at [email protected] 

Follow him on Twitter @andrew_kessel

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