Amid vast global uncertainty and disappointing Initial public offerings (IPOs), it’s no surprise that firms looking to list are delaying their IPO date until market outlooks improve. An IPO is when a company decides to list on a stock exchange in order to raise capital through selling shares of its company. The price of a share rises and falls according to the supply and demand of the share. When a company lists shares on the stock market, it must release its earnings every quarter to alert shareholders of its performance.
According to the Financial Times (FT), Dealogic’s data showed that IPOs globally have fallen by a quarter, down to around 800 firms. Global amounts raised from IPOs have also plummeted to a cumulative value of $116bn, which is 23% lower relative to the same timeframe in 2018.
Many big-named firms have also postponed their IPO. WeWork, a property firm that had delayed its IPO after massive cuts in its valuation and the removal of its co-founder and CEO Adam Neuman is a prime example.
Other companies that postponed IPOs include Endeavor, a media firm based in Los Angeles; Byte Dance, owner of video-sharing apps such as Tiktok and Traton a Volkswagen truck unit, due to unfavourable market sentiments.
According to Reuters’ sources, even Saudi Aramco’s IPO, possibly the largest global IPO, may not occur this year as problems with its valuation, as well as the Crown Prince’s reluctance to share private information slows down the listing.
The fall in IPOs arises from an uncomforting global market outlook, volatile investment sentiments, and investors’ lowered appetite for risk from unsatisfactory IPOs. Globally, stock prices have been highly volatile due to the high uncertainty caused by the US-China trade tensions, a possible Trump impeachment and the unrelenting Hong Kong protests. Even recently, the release of depressed global manufacturing reports on 2nd October had caused stock prices to dip.
In volatile markets with high uncertainty, stock prices tend to fluctuate with every new economic headline.
In volatile markets with high uncertainty, stock prices tend to fluctuate with every new economic headline. For example, the recent IPO crashes may also prompt investors to re-evaluate markets that historically had much higher valuations relative to earnings than firms in other markets. An example would be the US tech markets home to numerous tech unicorns. If other firms in the market do get revaluated along with those with poor listing results, this would only depress stock prices further.
As such, it’s highly challenging to appraise valuations for firms wishing to launch IPOs. IPO valuation for these firms tends to depend on various factors such as, the stock prices of similar firms, the willingness of investors to purchase the shares, and any other risks of the individual firm or its industry.
For example, if a manufacturing firm wanted to list on the stock exchange, it would have its firm valued relative to other similar manufacturing firms in the market. If the manufacturing market’s stock prices plummet (like in the current environment), the firm is likely going to have a much lower valuation for its IPO, vice versa. Firms would tend to wait than be rash if they believe they can gain better valuations after investors’ uneasiness and global headwinds blow over. According to FT, Endeavor reasoned that they postponed their IPO to “evaluate the timing for the proposed offering as market conditions develop.”
Moreover, many recent IPOs proved to be disappointing, such as the newly listed Peloton, Uber, and Lyft trading at below their initial IPO price. This hit investors harshly who bought into these firms at their listing price, as they witness the value of their portfolio plummet with the stock.
After getting stung repeatedly, investors scepticism soared and became increasingly more cautious with their portfolios, especially scares of another recession. Weak investor interest in WeWork’s and Endeavor’s IPO, coupled with the severe fall in stock prices for loss-making unicorns such as Uber and Lyft all suggest that investors are placing much more emphasis on a firm’s bottom-line and not the overhyped dreams they sell.
Without sufficient investor demand, many underperforming firms looking to IPO would forget about it for the moment or deal with highly dilutive low valuations and low post-IPO stock prices. Even so, things are not too gloomy for them as they have the option to gain funding from venture capitalists in the private market for working capital.
Of course, not all IPOs that occurred in this period are dispiriting. The Hong Kong-based Asian Budweiser Brewing Company had raised around $5 billion from its IPO, and the US tech firm, Datadog’s raised around $650 mil from its IPO and is still trading 25% higher than its listed price. Investors are still keen on certain IPOs as long as they are financially sound and can provide higher returns.