Investors have seen triple-digit returns on some 2019 IPOs, but UBS think there are 2 key reasons it could cool by midsummer
- This year's IPOs have broken new records, with Beyond Meat's stock popping 163% pop on the first day of trading. But UBS analyst Jason Draho said in a note Monday that it doesn't mean there's an IPO bubble.
- Instead, Draho thinks there is a hot IPO market, which could cool off organically in midsummer.
- Once companies start reporting their second and third quarter earnings, Draho said, prices will adjust to reflect their true values.
- Plus, he added, there's may not be a steady enough stream of IPO-ready multi-billion-dollar companies in the lineup to cause the hot market to bubble over.
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Investors who bought Beyond Meat stock during its public offering in early May saw a 163% pop on the first day, setting a new record and a celebratory tone for a busy IPO season which has seen half a dozen high-value companies enter the public markets.
While new heights may indicate that things can only go downhill from there, UBS analyst Jason Draho thinks it's too early to call the IPO market a bubble, Draho wrote in a note published Monday.
"Triple-digit returns beg the question of whether another IPO bubble is forming. It's fair to say that the IPO market is getting warmer just based on the returns," Draho said. "These returns suggest a hot, not bubbly, IPO market, but there has been an inflection around the Lyft IPO, as the market has gotten hotter since then."
Instead, the longterm momentum of the market will reveal itself in midsummer or fall, once the first of the big IPOs of the year report their second and third quarter earnings and investors get a sense of whether the companies are actually worth what they trade at, Draho reckons.
"That's also when six-month lock-up agreements begin to expire, enabling pre-IPO shareholders to start selling in large scale, potentially putting downward pressure on stock prices," Draho said. "All this suggests a runway of about six more months for this hot IPO market, after which it could continue or sputter out, depending on how the current IPOs perform."
In addition to the performance of companies like Zoom and Uber, Draho thinks the market could eventually cool off simply because there aren't enough unicorn companies going public.
"There needs to be an actual supply of IPOs, ideally by unicorns, for a hot market to even exist," he wrote. "Unlike the dotcom era when companies went public after only a few years of operations in order to raise capital, startups today have greater access to private capital and are staying private much longer. Consequently, we should expect far fewer IPOs in this hot market, barring a shift toward much earlier public listings."