Watch The Health Of The IPO Market
Is the IPO market in a bubble? What to look for...
by Bob Pisani
Is the IPO market in a bubble? What an obsession this has become in the last few days! On the surface, the IPO business is terrific: There have been 53 IPOs so far this year that have raised about $8.5 billion, far more than last year. There are also dozens of companies slated to go public in the next couple months.
But is the market in a bubble? There are a couple ways to look at the strength of the IPO market:
First: Opening-day pop. The average rise on the first day between the offering price and the closing price for IPOs this year has been 22 percent, according to Renaissance Capital. That is well above the historic average of a 13 to 15 percent gain.
During the internet bubble, for example (1999-2000), the average return on the first day was over 50 percent.
Conclusion: Still healthy.
Second: Post-IPO return. This is arguably a more important metric. For the companies that have gone public this year, from the IPO price until the close yesterday there have been an average gain of 29 percent.
That's good, but that figure has been dropping in the last few days.
That's important, because that number is very carefully watched by the IPO community. Why? Because people who are pricing IPOs now and in the near future watch that number, and when the number is dropping they will become more cautious on pricing their IPOs.
It makes sense: if prices for recent IPOs are dropping, investors in IPOs in the near-future will be more cautious.
Conclusion: Not alarming yet, but bears watching.
Third: How a basket of IPOs track against the S&P 500. There's an ETF for that: As of yesterday, the Renaissance ETF (IPO), a basket of recent IPOs, is up 2.8 percent for the year, versus an 0.5 percent gain for the S&P 500. However, that gap is narrowing in the last few days.
Why is the gap narrowing? Investors are worried about the froth, but they are also worried about the economy. I have said this many times: the health of the IPO market depends on the health of the economy and the stock market. These companies trade on perceptions of future revenue growth. If there is concern about the economy--or they think valuations have gotten too far ahead of themselves---IPO investors will look for a repricing.
Conclusion: Not alarming yet, but trend is worrisome.
Here's what to watch for in the coming weeks:
First, IPOs getting pulled. There are not many signs yet. However, last week Globoforce (THNX), a cloud platform that did employee rewards, was pulled.
Second, repricings. This is my main bellweather. Watch for repricings--I mean stuff that starts to price below the expected ranges.
That will be the first sign investors are starting to get more conservative. Pay particular attention to the economy, because we should be seeing signs that the economy is doing better after a miserable winter.
These IPOs are, for the most part, growth companies.
If the economy does not grow as fast as anticipated, growth companies will see a pullback in their IPOs.
This is particularly true of "cloud computing"-type companies that for the most part make no profits.
Third, watch the recent IPO after market. Another good barometer. How is stuff trading that just went public?
I see some concerns here. Look at A10 Networks (ATEN), which helps improve data centers, priced at $15 on Monday, went to $16.50 on its first day, but is now at $15 and looks like it might break.
Look at Castlight Health (CSLT), which helps companies with healthcare solutions. Went public less than two weeks ago, had a 148 percent pop on its first day of trading and was over $40, is now at $24, still above its IPO price of $16 but down every day since it began trading.
A bit worrisome.
Bottom line: We are at a very important juncture in the IPO market. Recent IPO pricings must stabilize and economic news needs to keep improving.
A lot of IPOs are depending on it.
Courtesy of CNBC.com