Pando

Finally, the big dogs are coming to the public stock market

By Kevin Kelleher , written on December 11, 2018

From The IPOs Desk

Finally, the big dogs are coming to the public stock market.

For most of the past decade, the tech startups that emerged, then mushroomed in growth, then came to dominate the industries they either created or changed – these companies have stubbornly remained private.

But in the past few days, signs are emerging that many of them may go public in 2019.

Last Thursday, Lyft sent out a press release announcing it had confidentially submitted a draft registration statement for an S-1, the form filed with the Securities and Exchange Commission to list a company's stock on a U.S. stock exchange. (Several people noted on Twitter the ironies involved in making a public announcement about a confidential filing to go public, but this is the IPO market now.)

Not to be outdone, Uber let it be known that it, too, had filed the confidential paperwork to go public. While much of the discussion has centered around which ride-hailing company will reach the stock market first, the timing of their offerings matters less than how their financials will look once they're disclosed. If Lyft's numbers look better than Uber's – or vice versa – it could affect the reception of both IPOs.

Also late last week, Slack Technologies hired Goldman Sachs to lead an offering it has planned for next year, Reuters said. And on Monday, Recode reported that Slack and Airbnb are considering going the direct-offering route that Spotify took to brings its shares to the public markets.

If all these companies follow through on their plans, it could give their loyal customers a chance to share, albeit belatedly, in the growth they helped generate. It's a hoary old ideal of the stock market: Invest in the companies you know, patronize, maybe even like. But the Airbnbs and Ubers of the past decade wanted nothing to do with such ideals, instead holding back the fruits of their capital gains to insiders and high-net worth investors who can participate in private markets.

Other well-known consumer-tech brand names, like Pinterest, Postmates, and Palantir, are often mentioned as candidates to go public in 2019. If all or even most of those companies debut next year, 2019 could be a record year for tech IPOs in terms of money raised, perhaps even topping the peak dot-com years of 1999 and 2000.

That's not to say next year could bring a return of a tech bubble. If 2019 does break a record, it will say more about how long many tech companies stubbornly held out before taking their stocks public. And, of course, names like Airbnb, Uber and Palantir have been mentioned nearly every year for the past several years as possible IPO candidates, yet choosing to stay private all along. The recent spate of headlines, however, suggest this could finally change.

Despite the volatility in the stock market during the past couple of months, 2018 has been a friendly market for tech IPOs, with many smaller tech companies debuting with a warm reception. According to Renaissance Capital, 188 companies have gone public this year, a 21% increase over 2017. Together, they've raised $46 billion, 30% more than the total proceeds raised last year.

Of those IPOs, 55 were in the technology sector, Renaissance says, the second most active sector behind biopharma/health care, which saw 76 IPOs. Among those tech companies are fairly well-known names like Dropbox, Sonos, DocuSign, and SurveyMonkey. Together with smaller startups focused on the cloud-enterprise sector, they've helped pave a strong enough roadway for bigger companies like Slack and Lyft to roll comfortably along.

The report of a renewed interest in direct offerings suggests how reluctant tech companies remain to endure the IPO process. Some people, including me, thought Spotify's decision to bypass the lengthy and costly underwriting process was a risky move, but so far it seems to have worked out well enough. The “reference price” of Spotify's direct offering was $132 a share. The stock rose as high as $198 during the summer, although it's fallen back down below that reference price during the tech selloff this fall. Spotify was trading at $127.90 a share Monday.

Regardless of whether these private tech giants stage IPOs or direct offerings, they could collectively raise tens of billions of dollars in proceeds. And the valuations that they could reportedly reach would make any mere unicorn blush right up to the tip of its horn. Lyft, valued at $15 billion in June, could be worth as much as $30 billion post-IPO, bankers have said. Slack, valued at $7 billion in August, could fetch $10 billion. Palantir could be worth $41 billion, and Uber, we're told again and again, is shooting for a $120 billion valuation.

If the reports are right, those four companies alone could be worth $200 billion after their offerings, or roughly half a Facebook. But it's not clear how willing institutional investors will be to support those valuations once the numbers come out. Plenty of tech IPOs have made their debuts with new haircuts - and not necessarily attractive ones.

And then there are the uncertainties facing the IPO market. There are always uncertainties, of course, but the wobbling and tumbling of the aged bull market in recent weeks suggests that the coming quarter or two, at least, could be tough ones for companies going public. With U.S. stocks heading for their worst year since 2008, some Wall Street strategists (typically a bullish lot on the whole) are bracing for another year of declines in 2019. Some are increasingly talking about a recession in 2020.

2019 offers nothing if not uncertainty. Will the Fed continue to raise interest rates, which helped spur the recent selloff? It's anyone's guess, as the Fed has shifted from its predictable path to more of a wait-and-see approach. Will the trade war with China be resolved or escalated? It's not looking good. And then there's a presidential administration in Washington that seems to pride itself on being unpredictable and, in the parlance of political journalism, “mercurial,” which is a fancy word for self-contradiction.

The decacorn holdouts are unlikely to have problems entering the stock market, but institutional investors in bear markets have a habit of being finicky about new listings that have both high valuations and big losses. That may not be a problem for, say, Airbnb, which is said to have been posting a profit this year, but it could be an issue for Uber, which has steadily been losing something like a billion dollars a quarter.

Wall Street finally threw a party this year for tech IPOs and the biggest names decided to show up fashionably late. The question now is whether they will show up too late for their own good.