2019’s IPO Lesson Appears To Have Been Forgotten

Despite 2019’s run of disappointing unicorn IPOs, it seems that any learnings from this went out the window with the arrival of the coronavirus.

Back in January 2019, investors were touting it to be the year of the IPO as several popular tech unicorns were finally going to burst forth and take Wall Street by storm. The time of the ‘old man stocks’ such as Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Facebook (NASDAQ: FB) was over. 

Fast forward 18 months and we look back on 2019 as a year of disappointment. While the likes of Beyond Meat (NASDAQ: BYND) and Slack (NYSE: WORK) have not been disasters by any stretch of the imagination, they have yet to live up to the hype that was promised. And then there was Uber (NYSE: UBER), Lyft (NASDAQ: LYFT), and of course the infamous WeWork IPO that never was. Peloton (NASDAQ: PTON) has found itself in the unusual position of having been considered a disappointing IPO by the end of 2019, but thanks to its status as an at-home stock, it has actually soared 130% since going public last September. 

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There were many successful IPOs, but going into 2020 investors had had enough of unprofitable, high-profile tech companies. However, these lessons appear to have been lost of late if you look at the situation unfolding around recently-IPOd Lemonade (NYSE: LMND), Agora (NASDAQ: API), and Accolade (NASDAQ: ACCD).

How did these IPOs go?

By any metric you can think of, it’s been a dream start to public life for these companies. Debuting on July 2, Lemonade enjoyed a stock jump of 139% on its first day, which it can now hold onto for the long Fourth of July weekend. Having IPOd at $20 per share, Agora is now up 182% in one week, while Accolade — which also debuted yesterday — is ‘only’ up 35%. 

Not to be a pessimist, I am thrilled for these companies which have worked very hard to get where they are, but doesn’t this all sound very familiar? Hyped up, unprofitable tech unicorns absolutely soaring out of the blocks, in the midst of a global pandemic and an extremely volatile time in the market to boot. 

Are these IPOs overpriced? 

Let’s be honest, this whole market is overpriced. We’ve got the Dow Jones (NYSEARCA: DIA) and S&P 500 (NYSEARCA: VOO) having their best quarters in decades while the tech-heavy Nasdaq (NASDAQ: QQQ) is hitting all-time highs for fun. Then, of course, there is the world’s most valuable car manufacturer, Tesla (NASDAQ: TSLA), which has soared 235% since its March lows, and whose CEO, Elon Musk, has also called overpriced. 

The same issues of ‘overpriced and overhyped’ live true in 2020’s unicorns too. 

Having originally planned to IPO at between $23 and $26, Lemonade sold 11 million shares at $29 each, raising more than $300 million which rose to $744 million, based on the closing price of $69.41. For a company with cash equivalents of about $567 million prior to the IPO, this is nothing to be sniffed at. Similarly, Agora’s $350 million raised on IPO day ended up being worth $880 million by market close. 

On one hand you can put this down to optimism about tech’s importance to modern society, but there is also the issue that banks are trying to price offerings based on its own set of valuation metrics while investors may simply be ‘buying the hype’. 

So, what now? 

Right now, Airbnb is probably wondering if they should have ridden this hype train to raise money that could offset 2020’s catastrophic losses, as investors would just eat its shares up. However, the worry for companies such as Lemonade is that history is repeating itself.

The insurance tech company is yet another unprofitable hype machine, reporting $67 million in revenue last year with a loss of $108.5 million, compared to $22.5 million in revenue and a loss of $53 million in 2018. The business itself is certainly exciting and one to watch, but how long will investor patience last with a company that bleeds hundreds of millions of dollars and claims to still be in a ‘growth’ stage for the foreseeable future? 

Obviously, it is very early days but it seems clear to me that this recent bout of IPOs is another overpriced disappointment waiting to happen. That is not to say that they will not be successful in the long run, but investors should expect some volatility in the years to come. 

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.