Uber was the most anticipated IPO of 2019, raising $8.1 billion on a $82 billion valuation. The $82 billion valuation is being justified by Uber’s annual growth rate of 42%. The ridesharing company has upended the traditional taxi market to build revenue near $12 billion annually. The company is extremely unprofitable losing $1 billion dollars in the first quarter 2019. According to the company’s safe harbor statements, the company may never achieve profitability. The stock performance since IPO remains dismal with a negative 1.7% return, as investors have concerns about the amount of negative free cash flow -$1.96 billion being used to operate the business. There remains no clear path to profitability and the IPO appears to be a cash grab to allow early state investors an exit.
The top performing IPO of 2019 is Beyond Meat Inc (BYND), a specialty food company making vegan alternatives on classics such as Hamburgers, Sausage and other ground beef products. The IPO valued the company at $240 million, making it a micro-cap. The share price is trading at $151 per share, up 506% from its IPO price of $21 per share since May 2nd. The company is capitalizing on a health food craze where consumers want alternatives such as plant-based meat alternatives and organic foods. Based on the current share price, the company is trading to 79 times price to sales TTM, or in other words it will take the company 79 years to have an equal amount of sales to their current share price. The company is not profitable and lost $4.75 per share in 2018, or $30 million dollars. The company has an extremely low share count at 6.3 million shares outstanding. The low share count coupled with the growth prospects in the plant-based meat market has driven the share price to parabolic levels. Its difficult to peg a price target on a new IPO with such high growth prospects, but one thing that has been consistent over the past 10 years is the market pays a premium for growth and punished companies with no growth.
The IPO ETF which follows IPOs has underperformed the broad market in 2019, showing a negative 3% return. There isn’t much optimism surrounding the IPO market this year as investors sense an impending recession and a bunch of late stage companies rushing to the market to make a final cash grab before an economic downturn. 3.79% positive return in the IPO index can be attributed to ROKU, which has risen 205% YTD. The biggest loser in the index is NIO, which has fallen 50% YTD and caused the index to fall 30 bps. Most of the portfolio weighting is in Information Technology and it has attributed nearly 9.43% of positive return YTD.
There is a belief amongst Venture Capitalist and Private Equity that there is a bubble brewing in the technology sector late stage companies, as evidence by WeWork. WeWork provides office space to small businesses and individuals by leasing prime real estate in major economic centers. It is believed the company may be valued near $50 billion when it IPOs later this year or early next year, but questions linger about this valuation as a major investor “Softbank” has been offering exit options for early stage investors that have a valuation in the low $20 billions. WeWork is losing near $2 billion annually and showing the markets extreme optimism that one day the company will turn a profit by pegging such a lofty valuation. IPOs remain a difficult investment in the public markets and are best left to retail investors. If you are lucky enough to secure an early stage investment opportunity, it is better than hopping on the band wagon at the cash out stage.