- Date : 03/02/2020
- Read: 10 mins
What are some of the biggest IPOs launched in 2019 and what to look forward in the coming year
Airbnb is planning to go the primary market route in 2020. CEO Brian Chesky says he has learnt two lessons from WeWork’s misadventure with its proposed IPO: the value of profit margins and the value of reputation.
WeWork, the New York-based commercial space rental company, skidded from one crisis to another amidst reports of financial wrongdoings ever since it publicly filed its IPO papers in August. In the end, the company announced it was delaying the launch indefinitely.
“Microsoft and these big tech firms have really high [profit] margins and other companies have really low margins,” Chesky said in a talk later. “I think that’s the first lesson of WeWork,” he said, alluding to the latter’s weak financials.
The second lesson was the value of reputation; according to Chesky, company founders often forgot that their actions could later return to haunt them.
“It’s also easy to underestimate the amount of responsibility we have,” Chesky said in an oblique reference to WeWork ex-CEO Adam Neumann, who is now reportedly being investigated for fiduciary misconduct.
But why are we talking of lessons the CEO of one company learnt from events that unfolded in another? Because Chesky’s ‘lessons’ seem to reflect what went wrong with mega IPOs in 2019 at a global level, and what clicked.
Related: Is your IPO rightly valued?
Everything didn’t go as expected in the world IPO market during this year. From mega flops to solid showings, 2019 turned out to be a mixed bag – even though globally the flops seem to have outnumbered the hits.
Highly anticipated IPOs from unicorns such as Lyft and Uber (or for that matter the no-show from WeWork) have disappointed. Even a highly profitable company like Saudi Aramco – which, in fact, is the world’s most profitable business as per financials accessed by Bloomberg – seems to have left investors tepid.
The Pinterest IPO in April, on the other hand, successfully raised $1.4 billion, with the company having taken a slow and steady approach to growth.
Similarly, in the Indian context, local IPOs seemed to have held their own to break worldwide trends, with the primary market emerging as the money tap for investors in 2019.
And all this – the good and the bad, as well as the global and the local – seem to have boiled down from the two factors Chesky identified: profitability and/or reputation of the companies concerned.
In this context, a look at some headline IPO performances should be illustrative:
IPO snapshots: Global
Since we started with Chesky’s take on WeWork, it is only fitting that we also start the IPO reviews with WeWork.
The company, which owns or has taken on lease commercial space totalling 5.2 million sq ft in New York City, is in the business of renting out workspaces on short-term leases. The concept appealed to startups, professionals, and companies that wanted a presence in the city without long-term contracts, and WeWork found ready tenants for its space.
The problem was that, given New York’s high rents, too many of the company’s rented-out spaces were cubbyholes that did not generate much revenue. As a result, it totted up losses of $689.7 million on revenues of just $1.54 billion in the first six months of 2019.
Moreover, as it transpired, the company’s then CEO Adam Neumann offloaded $750 million worth of personal stock leading up to the IPO date, denting investors’ confidence. He’s also been accused of wasting company funds to refurbish his office.
Little wonder then that the WeWork IPO roadshow was not well-received, forcing the parent company to withdraw – at least for the time being.
￼ ► Uber
In the decade since its launch in 2009, Uber has grown into a $100 billion company, and as a Forbes article said, “It’s become so big and popular that it’s hard to imagine the world without it.”
So, when Uber launched its $8.1 billion IPO in May, the event was hailed as the biggest thing to happen in the primary market space since the Facebook IPO in 2012. But there was a snag: even after operating for 10 years, the company was still making losses that continued to spiral, with no signs of a let-up.
According to estimates, Uber’s losses touched $1.8 billion in the US in 2018, and horror of horrors, it had already burnt an astronomical $5 billion in the last quarter from the $9 billion it raised through its IPO.
The basic problem lay with Uber’s business model; it gives 80% of revenues from fares back to its drivers. Raising fares won’t help, as the drivers’ outgo ratio will remain the same. To add to the problems, Uber is engaged in a self-mutilating price war with Lyft, its main rival in the US. It is estimated that the two companies have lost a combined $13 billion.
Uber can’t afford to lose ground to Lyft, having already been overtaken by the Estonia-based Bolt in London, one of its biggest and most profitable foreign markets for years. It has had to exit Russia, China, and South East Asia, having similarly lost to local competition such as Grab.
Uber’s profit margins (or lack thereof) impacted its IPO. Despite the hype surrounding its market entry, Uber’s stock registered the worst first-day dollar washout in US IPO history, notching a 7.6% loss on debut. (Incidentally, Lyft fared no better with its IPO.)
Not all tech-based IPOs flopped. Pinterest is showing that if the fundamentals are strong, unicorns can do well too.
Pinterest, which trails behind Google and Facebook in terms of ad revenues in a crowded digital marketing space, went to investors in early 2019 with one message: ‘We are not social media or a search engine.’
Though not a profit-making company, it managed to raise about $1.4 billion from the IPO. At the time, the listing was the second biggest in the US in 2019, only behind $2.34 billion IPO. Uber had yet to come out with its $8.1 billion offer.
So what clicked for Pinterest? Bloomberg reckons it’s the “slow and steady approach to growth and making money from the service, compared with the faster expansion rates of Facebook, Twitter, and Snap when they went public.”
Other analysts believe Pinterest has the potential to increase its share of the $500 billion global digital advertising market; maybe even displace current leaders Google and Facebook. They expect Pinterest to clock a CAGR of 35% through 2023. In their words, investors see a company ‘high on fundamentals and low on flashiness’.
► Saudi Aramco
Among the non-tech IPOs to disappoint is the state-owned Saudi oil giant Aramco.
In 2016, when Saudi Arabia’s Prince Salman first mooted an IPO for Aramco, he was hoping to raise $100 billion. At that point, he targeted a valuation of at least $2 trillion. So excited were overseas investors that even US President Donald Trump evinced interest, adding to the hype and general buzz around Aramco.
But in the end, both parties (investors and Aramco) shunned each other. Several factors turned off international investors, and sensing the mood, Prince Salman decided not to target US, Canadian, European, or Japanese investors and instead rely on wealthy Saudis to invest.
Aramco is expected to raise about $25 billion – still the biggest haul so far, but well below the $100 billion the Prince had originally wished for. The company’s valuation was also whittled down to $1.7 trillion from $2 trillion. In short, Aramco disappointed.
So what went wrong? It can’t be profitability. Though Aramco recently disclosed a year-on-year decline in net profits for the three quarters that ended in September, the company may well be the most profitable in the world.
Apparently, global investors got spooked by Aramco’s reputation, apart from other factors such as geopolitical risks. Also, the drone attack earlier this year forced it to halve production. That aside, investors felt they would not have much say in company affairs, and that the Saudi government would dip into profits at will.
In India, the factors that have kept the secondary markets volatile in 2019 – a slowing economy, the US-China trade war, and a foreign fund outflow – seem to have had little impact on stocks that got listed during the year.
Data collected till October 4th shows only three out of 11 stocks traded below their respective issue price, with IndiaMART InterMESH registering the biggest gain, trading 49% above the issue price.
As to why IPOs this year did well, two reasons have been cited. First, debut listings from 2019 were more from the services and financial sectors, which were less affected by the slowdown. Secondly, investors have been enthused by their healthy book values.
IPO snapshot: Indian
One issue that caught the fancy of Indian investors was IRCTC, the catering and ticketing arm of Indian Railways. Its recent IPO was subscribed nearly 112 times – the most overwhelming response that a PSU float has ever received.
With a price band of Rs 315-320 per share, the issue received bids for Rs 72,000 crore (against the target of Rs 645 crore) from all categories of investors – FPIs, HNIs, institutions, and retail.
IRCTC seems to have met both criteria critical for an IPO to be successful: profitability and a good reputation. In the past two financial years, IRCTC’s total revenues grew at a CAGR of over of 10%, and operating profit of over 9%.
As of FY 2019, IRCTC’s operating profit margin and net profit margin stood close to 20% and 14% respectively. The company is free of debt, and ended the last fiscal with cash and cash equivalent of close to Rs 1140 crore.
The company also enjoys a high brand recall, thanks to its monopoly as a booking platform for railway tickets; its business is familiar to most Indians who invest in stocks.
When 2020 beckons
The coming year is expected to see a wave of high-profile listings globally, including the Ratan Tata-led Jaguar Land Rover (JLR) in the UK.
JLR has for long been rumoured to be considering an IPO, but three factors seem to have derailed plans till now: the Brexit waffling, declining diesel sales, and falling Chinese demand. The markets believe the company is now waiting for Brexit tensions to ease before pursuing the IPO, which could see it valued at up to £2 billion.
In the US, one IPO that investors are eagerly awaiting is that of Chesky’s Airbnb. The company announced in September that it expects to become a publicly-traded company during 2020.
In November, Airbnb took a huge leap by signing a $500 million sponsorship deal with the International Olympic Committee (IOC) to provide accommodation during all Olympic events till 2028, including Tokyo 2020.
Using the Olympics to coincide with its IPO was a great move; all that Airbnb needs to do now is convince investors about its profitability. Here are some things you should know about IPOs.