Apr 17 2014, 4:12pm CDT | by Forbes
The two-year anniversary of Facebook’s 2012 IPO is just a month away, and if recent trends continue the demand for new offerings may start resembling the freeze that followed the social network’s debut.
After that botched open, it took weeks for the next batch of IPOs to come through, and in the midst of the hottest IPO market since the dot-com bubble there are signs that conditions have gotten overheated and investor appetite is waning.
For one thing, the number of unprofitable companies flowing through the IPO pipeline has swelled. Jason Goepfert, author of the SentimenTrader Daily Report, cites a statistic that 83% of deals in the last three months were from money-losing companies, the highest such figure since the first quarter of 2000 (h/t to the Wall Street Journal).
That alone doesn’t mean the IPO market is going to grind to a halt. Far more important are the returns for both the broader market and the most recent predecessors to companies going public today. Unfortunately for the optimists there is softness on that front as well.
The Nasdaq Composite and Russell 2000, home to high-growth names in sectors like tech and biotech that are well-represented in the IPO market, are each in negative territory for the year, down 1.9% and 2.7% respectively.
A number of recent deals have proven disappointments as well. Candy Crush parent King Digital landed with a thud in late March. The much-hyped app-maker priced its offering two dollars below its expected range and spent its first trading day in the red. Even a recent comeback still has the stock more than 10% below its offer price.
That still leaves room for the occasional hot deal, but a 65% first-day pop like the one Zoe’s Kitchen enjoyed last week has quickly become the exception rather than the rule. This week’s slate of deals has shown cracks, with several struggling to even reach the public market. Paycom Software had to postpone its offering from last week to Tuesday, ultimately pricing below its expected range.
That wasn’t such a badge of dishonor this week, with all 10 companies conducting public offerings pricing at the low end of their range or worse, according to market data firm Ipreo. At least that shows management teams and bankers are being responsive to fading IPO appetites.
Weibo, commonly referred to as China’s version of Twitter, took a while to get going as its opening bids were sorted out Thursday, but by the afternoon shares were climbing, closing with a 19% gain. Meanwhile travel software-as-a-service firm Sabre, the parent company of Travelocity once owned by American Airlines and taken private by Silver Lake and TPG in 2007, debuted to a slim 3% gain.
Both owed their advances to more realistic expectations though, selling fewer shares than initially planned at lower prices.
To Sabre Chief Financial Officer Rick Simonson, getting out into the market and putting the company’s shares in the hands of public investors was more important than waiting for a more opportune moment.
“Markets have their ups and downs,” he told Forbes Thursday morning, “we try not to get overly enthusiastic when markets are up, or depressed when things cool off.”
Sabre, which counts major hotel chains and airlines among the clients for its travel software services and technology, is among the group of money-losing companies making their public debuts this year, but at least in its case those losses are shrinking and revenues are rising, not to mention that it will pay a dividend right out of the gate.
Simonson touted the company’s recurring revenue sources as a reason for confidence, and if investors buy in to that sentiment to send Sabre and other IPOs of recent vintage higher the window could be pushed back open for the next batch of deals. If not, the first significant IPO slowdown osince the post-Facebook freeze may be on its way just in time to greet the expected offering from Alibaba later this year that has its sights set on the social network’s records for a technology debut.
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