Renaissance Capital's early 2019 research portended good things for the IPO market. In January, the financial firm cited a “large backlog” of U.S. IPOs that grew during the federal shutdown.
In February, it found more than 220 private companies looking to go public this year, including Uber, GE Health Care, WeWork and Airbnb. With this lineup, Renaissance found a strong possibility that 2019 IPO proceeds will strike $100 billion — surpassing the 2000 record of $96 billion.
By March, more than 230 companies with an aggregate valuation of $700 billion were found to be targeting 2019 IPOs.
A Magical Stampede
The run is spurred by a wave of tech unicorns — private startups valued above $1 billion. While investors may be suspect of the boom’s longevity, one Street expert said it’s not temporary.
"We haven't had a lot of tech IPOs. There were just 52 last year. In the heyday in the 1990s, we got over 250 tech IPOs every year through the back half of that cycle," DataTrek Research co-founder Nick Colas told CNBC.
"So, even though this feels like a big calendar coming up, it really isn't by historical norms — particularly those norms that we worry about in terms of tech cycle tops and peaks."
While the IPOs don’t play into a bubble, according to Colas, they may still prove risky.
"These companies are all remarkably unprofitable. Lyft lost $900-million-plus last year, and all of these are cyclical companies, as well, unproven by an economic downturn," Colas said. "Ultimately, buying an IPO is one of the riskiest things that an investor could do."
It’s worth noting, though, that even major money-losing unicorns may find strength in the market. In 2018, many unprofitable companies boasted stronger IPOs than profitable companies, according to Recode.
At the very least, they should prove more stable than their unicorn predecessors.
"While there are legitimate concerns about high valuations and earnings potential for some companies, these are not dot-com IPOs," Jason Draho, head of UBS Asset Allocation, Jason Draho, said in a note. "The unicorns that could go public today are larger, older and more established than those early internet companies, attributes which have historically correlated with better long-term returns."
How To Ride The Unicorn
Renaissance exposes investors to the IPO boom through its RENAISSANCE CAP/IPO ETF IPO. The ETF has risen consistently since the start of the year and now sits 35.5% higher — far outpacing the growth of the S&P 500.
The ETF captures the likes of LEVI STRAUSS LEVI, Lyft, Spotify Technology SA SPOT and Snap Inc SNAP. It will soon reflect the launch of Slack, Uber, Pinterest and Airbnb.
"What's also intriguing about this ETF — besides being very small and not that liquid — is that it rebalances every quarter and then a stock can only be inside for two years, so you get a short window of time to hold these potential up-and-coming companies,” CFRA senior director Todd Rosenbluth told CNBC.
An ETF competitor, 1ST TR EXCHANGE/US EQUITY OPPORTUNI FPX, offers a similar portfolio with the IPOX 100 U.S. index, but holds its assets for four years instead of two. Its largest current holding is PayPal Holdings Inc PYPL.
One market expert advises taking a more direct and immediate route to owning IPOs.
"In the six months after the first day, IPOs [from 1980 on] performed roughly in-line with risk-adjusted market returns, but after five years, about 60% of all IPOs had negative total returns and a small percentage had exceptional returns," said UBS' Draho.
"In short, IPOs can be attractive investments if you can get an allocation in the offering, but much less so when buying in the secondary market."
What Could Go Wrong?
CNBC’s Jim Cramer fears that, if the offerings find support, they may siphon it from the broader market and slow the ongoing rally. A surge of mergers and acquisitions may then be needed to alleviate the pressure.
“[That is the] only way we make it through the upcoming wave of IPOs in one piece," the CNBC host said.
There’s always the possibility that the market rejects the offerings, though.
"We are concerned about how the public markets will absorb all this issuance," Renaissance’s Kathleen Smith told CNBC.
By Smith’s estimate, private valuations are already generally inflated, and the flood of IPOs may bring low-quality stocks at unjustly high prices.
"That's how the market could roll over,” she said. “In IPO land, the market builds up a head of steam, and then everyone loses pricing discipline.”
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