Last year saw an uptick in initial public offerings (IPO’s) with 190 companies “going public.” This increase in IPO’s set the stage for 2019 to be the year of the coming out party for some of the most anticipated IPO’s in years. There are many theories for why, but these days, private companies are waiting much longer to go public. Whether this is due to wanting to avoid more regulations of being a public company or quite frankly, there is so much capital out there to be invested (even in private companies) there isn’t a real need to go public… the fact is companies are waiting and with that comes ramifications.
From our perspective, this lengthy private stay has exasperated the perceived value of these companies. And it seems the more well-known your company or more mainstream the company has become, the higher the private valuation. In addition, many of these so-called unicorns (Entities worth more than $1 billion) have taken to creating their own financial metrics to measure the real value of their business. Newsflash, this might be due to the fact most of these private companies DO NOT make money. In fact, most of them lose a tremendous amount. But hey, everything is rainbows & unicorns with these tech driven companies that are truly making our lives easier/better… right?
Unfortunately, for more than a few of these unicorns, the rubber meets the road when they decide to do an IPO. And we don’t have to look any further than the two companies changing the way many people commute (anywhere)… Lyft and Uber. These two life changing companies are nowhere close to earning a penny, which was fine with the private investors, but this is not always the case with the public investor.
As you can see by these stock charts, both companies have received less than stellar receptions by the public stock investor. Lyft has proceeded to drop 25%+ in market value since its IPO on March 29th and Uber has dropped just about 5% since its IPO on May 10th. We don’t typically make it our business to invest in companies losing gobs of money in hopes for future gain, so we won’t weigh in on their current market prices. But we do have an idea for why many times these high-profile companies tend to head south once coming public.
Quite frankly, in the private world everything is really rainbows and unicorns… especially when it comes to valuations. Anyone involved is already an investor in the company or wants to be an investor in the company. So, where is the resistance to the valuation rising going to come from? Essentially there are ZERO short sellers involved, therefore as long as the company continues to grow revenue, its valuation will continue to rise.
Now, imagine this happening over nearly a decade of private ownership, rather than just a few years. The perceived value is that much greater when/if said unicorn comes public. The important question now is, is this private valuation representative of the real value of the company? If it’s not, the company stock may feel some pain shortly after its IPO. As we like to say, the stock market is like truth serum… eventually a company’s market value will represent its true valuation.