IPOs, leaving money on the table and get off my lawn



The current earnings cycle has repriced two bellwether internet companies: Snap and Twilio.

The two firms are very different. Twilio is a respected back-end tool used by a cadre of familiar companies to reach consumers. Snap is a social company dabbling in mobile hardware. But the first quarter’s tallying up was rough on each.

Twilio, part of 2016’s IPO crop, fell off a cliff after reporting better-than-expected results but slack guidance. By the next day, investors clipped its wings by around a fourth.

Snap, the leader of 2017’s IPO crew, took a dive after it missed on revenue, profit and active users. The company shed billions of dollars in value overnight. In fact, the company’s value nearly retreated to its original IPO price.

That brings us to our topic: IPO pops, who makes off with the money and leaving money on some damn table.

Pops and other mirages

When a company goes public, it is (generally) accepted that the firm will price its shares as high as it can to maximize its capital intake and still afford itself some breathing room for first-day gains.

That hits all points you might want: The company sets a price that generates lots of cash for itself, while reserving a portion of potential return for the public markets, helping to ensure that it posts a substantial bump. That first-day pop leads to another set of positive headlines, and so forth.

How much of a pop you want is open to debate. The styles vary. But it is impossible to accurately guess what the market will do with your company once it goes public; therefore, you cannot price your shares perfectly to ensure, say, a 10 percent bounce on the nose.

And this is when things get sticky. What happens when public demand and price-insensitivity for companies are greater than the company and its bankers anticipate? The pop is larger than expected, as the company likely priced slightly “low.” The opposite can happen too, of course, when a company goes public and instantly sheds value.

(We’ve seen that this year, in fact.)

Regardless, when a company goes public and does well, there are inevitable pieces penned arguing that the company “left money on the table.” While leaving money on the table is sometimes true, it is a statement that is often declared prematurely.

By that I mean that companies often go public to great initial result; however, those results can fade faster than a Falcons’ lead. And that means all the “leaving money on the table” talk is likely bunk, as the very premium that was pointed to as evidence of an IPO-timed mispricing was, in itself, a false signal.

Recent examples

What does that imply in practice?

It means Snap might have priced itself more intelligently than many thought.

Snap — which went public at $17, opened at $24 and shot as high as $29.44 — looked like a company that could have raised an ocean more capital than it did. After all, since Snap sold 200,000,000 shares, every dollar in value it could have added to its IPO price would have generated a material benefit to its bank account.

At $24 per share, or $29.44, it looked like Snap had made a pretty serious error. But since its first earnings announcement, Snap traded as low as $17.59 before closing at $18.05 on May 11.

If Snap had priced at $18 per share — just $1 above where it finally landed — the company would have fallen below its IPO price. If it had priced at $19, two dollars higher than it did, the deficit would have been even worse. If it had priced at its first day open, Snap would be even further underwater. You can extrapolate from there.

Snap is now worth just a few dollars over its initial IPO price — a little more than a 20 percent bump. That’s hardly a dramatic mispricing given our prior stipulations. (And, keeping in mind how hard it is to price a company that only became gross margin profitable last year, it’s actually pretty impressive.)

Turning to our second example, Twilio closed up its first day at $28.79, up nearly 92 percent from its IPO price. The company then shot to more than $60 per share. Then it fell into the 30s. After its last earnings report, Twilio is back to the middle-low 20s. Immediately after its IPO, it appeared that Twilio had mispriced the offering, despite pricing above range. That concept has been undercut by ensuing declines, better harmonizing Twilio’s current value and its value at IPO.

Regardless, you can make a small argument that Twilio, now worth $24, should have priced higher than $15 at its IPO. At the same time, the company has a full year’s growth under its belt since that event. So comparing prices so precisely is persnickety.

The two firms show that it can often be premature to claim that high-flying IPOs mispriced their offerings. Still, the counter-argument to the above is simple: Both companies are still trading above their IPO prices, so how certain can we be in our complaint?

It’s a fair point, so let’s rewind a bit further.

Ancient examples

GoPro’s IPO was a smashing success. After going public at $24 per share, it closed its first day up 30 percent. As coverage then noted, that run continued with more double-digit gains. Quickly, GoPro was up 100 percent from its debut price. That was in July of 2014.

Later in 2014, GoPro would trade for $98 per share. What an IPO misprice, right? No. Here’s a headline from November of 2015: “GoPro Shares Fall Below IPO Price.” On that day, GoPro closed at $23.15. Now, the company is worth $8.62 per share. Going public at $24 per share now seems like a lucky strike.

You can run the same game with Etsy, MobileIron and Fitbit, companies that went public to great initial result but later declined.

All this is to caveat the rest of the current (active!) IPO cycle. Keep your wits about you, and pay more attention to the amount of capital companies raise relative to their cash needs. The rest, provided a flat-or-better IPO-valuation-to-last-private-valuation, is noise.

Unless the company actually declines. At that point, you have an entirely different situation.



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