Lousy IPOs — Are We Seeing the Extinction of the Unicorn?

IPOs (Initial Public Offerings) — when companies first list on the stock market — used to be sure-fire money-making options. Often, they were oversubscribed. If you needed the money, you could usually sell the shares you received at a higher price than the IPO.

But this was in New Zealand years ago.

The first one I got involved with was Vector [NZX:VCT]. The business looked like a steady earner to me, sitting on valuable monopoly assets — owning the lines to distribute electricity and gas. Entrust (formerly the Auckland Energy Consumer Trust — AECT) still owns about 75% of the company.

Anyway, the day the company listed back in 2005, shares shot to a premium of 26% above the IPO price.

Now a lines company is never going to be a high growth enterprise. Over the years it’s provided a steady dividend of 4–5% per annum. However, the price has still climbed to 57% above its IPO price as of today. For me, that’s more pleasing than locking up my rainy-day savings in a term deposit.

But more exciting are the growth company IPOs.

When Xero [ASX:XRO] listed back in 2007 — then on the NZX, shares were only $1 each. They trade around more than 60x that on the ASX today.

Where have all the good IPOs gone?

The Vector and Xero IPOs were very different propositions. With Vector, investors got to own a secure, dividend-paying electrical and gas distributor. With Xero, the chance to take a stake in the fortunes of a fast-growing accounting software company. 

Both have been profitable in line with their risk profile. Those who took the risk on the Xero business when it was still quite small deserve their 6000% return. Likewise, with Vector their 57% capital return plus regular dividends on top.

But these opportunities at both ends of the spectrum now seem few and far between, at least here in New Zealand.

My colleague Taylor’s research shows that the NZX is very expensive to list on — twice the listing fees of the US NASDAQ.

This is very concerning. Capital markets are the lifeblood fuelling new businesses.

Should the NZX remain expensive and cumbersome for companies desiring to list, the exchange will lose out to private equity — which is growing.

Private equity is already moving in on existing listings. Trade Me was just acquired by UK-based Apax Partners, with shareholders being paid out $6.45 per share.

Looking at overseas IPOs

Recently, Lyft [NASDAQ:LYFT] and Uber [NYSE:UBER] IPO’d.

Both companies have been racking up big losses as they burn capital to roll out their business models.

Stock prices have struggled to perform since listing.

Do you know who has really made money with Lyft and Uber? Private equity capital that got in early. The IPOs are a bit late.

I came across a family office in Europe that invested in the early days of Uber.

General Motors [NYSE:GM] acquired 18.6 million shares in Lyft in 2016 for $500 million — or around $26.88 per share.

GM has done nicely. Even after the listing declines, they could still sell out and potentially double their money. Although they do face a 180-day lock-up period following the IPO.

Strategically, GM is aiming to leverage its investment in Lyft with its robo-taxi programme, Cruise. Yet, that all seems a long way off.

GM CEO Mary Barra announces the self-driving Chevrolet Bolt test vehicles that could make their way into Lyft’s fleet. Photo source: General Motors

For those who bought into Lyft in the March IPO, it’s been a disaster, with the stock price falling some 35%.

I was comfortable holding GM when they got into Lyft. Like the Family Office and Private Equity getting in early, they obtained such a low price that it’s hard not to make money on the IPO. But in terms of Lyft itself? Or Uber?

It’s a struggle to predict when these businesses will make a profit. Uber lost $1.8 billion in 2018; Lyft lost $911 million.

In fact, prior to its IPO filing, Uber admitted it may never make a profit.

Is this a case of ‘The Emperor’s New Clothes’? I don’t know about you, but I wouldn’t want to invest in a business that’s never going to make a profit.

Uber doubts

I’ve had doubts about the Uber business model since I first used it.

The main reason I use Uber is because it’s meant to be cheaper than a taxi. Seeing my fare, the car on an app or not having to pay the driver direct — these are not world-changing benefits.

What we’re seeing overseas is that for lower fare trips (below $35), a taxi can be cheaper than Uber. Such trips account for about 94% of taxi fares.

And my general experience is that regular taxi drivers are friendlier, more helpful, more English conversant, and less on ‘robo’ mode than anything I’ve experienced with Uber.

So it’s a struggle to see a $72 billion company based on migrants supplementing their income driving you around just because it’s on an app.

One IPO I am looking forward to

There is one company that could IPO soon. And it does offer a genuine, world-changing benefit. It’s the US’s largest start-up. And it’s been profitable since 2017, where it booked $93 million profit from $2.6 billion in revenue.

As a guy with two kids, I was getting a bit tired of being ripped off by the hotel industry because I wanted another room or a bit more space.

And I was sick of nameless blocks of hotel rooms, no matter how luxurious.

The solution? Airbnb. People all over this country and the world have beautiful cottages, homes, and rooms they’d love the chance to earn some income from. Many delight in being hosts and taking pride in their property and service.

Because the property belongs to them.

Airbnb creates a genuine network of benefit that seems to make sense. Not only do I typically get better value than a hotel, I get a better experience. Hotel staff come and go. The owner of the small cottage I stay in in the Wairarapa takes pride in the home he’s built in his own backyard.

When we arrived, his new lawn hadn’t grown as expected. He left a note to explain, with two bottles of Martinborough wine alongside.

But I’m also worried Airbnb could impact the hotel industry. I’m no longer as bullish on some of the hotel REITs previously invested. Clearly, we have a real disruptor in Airbnb.

When it does list, you’ll need to do a careful valuation of the business to make sure you don’t overpay and lose on the IPO, as so many have done with Lyft and Uber.

It may simply be so expensive it’s hard to make much on it. Or maybe they’ll counter that with plans to pay out some of the significant cash flow as dividend.

These days, you’re usually better to invest before the IPO. But for most people that’s not possible. Let’s see how they price Airbn, if and when.

Regards,

Simon Angelo
Analyst, Money Morning New Zealand

Important disclosures

Simon Angelo owns shares in Vector [NZX:VCT] and General Motors [NYSE:GM] (via wealth manager Vistafolio).


Simon is a contributor to Money Morning and has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge fund industry in Europe. Before this he owned an award-winning professional services business and online learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book and manages global share portfolios.


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