A stock trader wearing a mask walks near social distancing signs the day a new IPO is launched at the New York Stock Exchange as the city continues Phase 4 of re-opening following restrictions imposed to slow the spread of coronavirus on August 27, 2020 in New York City. The fourth phase allows outdoor arts and entertainment, sporting events without fans and media production.
Alexi Rosenfeld | Getty Images
No one would have believed this even three months ago, but this may turn out to be the biggest year for IPOs since Alibaba went public in 2014.
Already, 111 companies have raised $37.8 billion, according to Renaissance Capital. In 2014, the year Alibaba went public, $85 billion was raised.
And that is without the SPAC market, which is also on fire.
What’s behind the enthusiasm?
Element 1 for a hot IPO market: A hot stock market
“First and foremost, the stock market is on fire,” one IPO trader, who asked to remain anonymous, told me. “As long as you have a hot equity market, you are going to have a hot IPO market.”
Element 2: Recent IPOs outperforming
Second, recent IPOs have been burning it up. “Seventy percent of all IPOs are trading above their issue price, way above the average of about fifty percent,” Kathleen Smith from Renaissance Capital, who advises investors on IPOs, told me. “IPOs are now attracting momentum players.”
The Renaissance Capital IPO ETF (IPO), a basket of the 60 or so largest IPOs in the last two years, is up 64% year-to-date, far outperforming the broader market.
Most importantly, tech companies dominate the outperformers, particularly software.
Recent IPOs (from issue price)
- Vroom up 235%
- Zoom Info up 83%
- Rocket Companies up 87%
- Li Auto up 54%
- Jamf up 47%
Element 3: A strong pipeline
And software is what is coming: a tidal wave of enterprise software companies are seeking to go public right after Labor Day to capitalize on the positive convergent trends. Snowflake (cloud data analysis), Unity Software (3-D video games), Bentley Systems (software for construction projects), GoodRx (prescription drug pricing platform), JFrog Holdings (software update platform), and Sumo Logic (data analysis) all have S-1s out and will likely seek to public soon after Labor Day.
Two other firms — Asana (project management) and Palantir — have both said they would use a direct listing approach to go public.
All have the magic ingredient: strong revenue growth.
Revenues (YOY growth)
- Snowflake: up 173%
- Unity Software up 42%
- Sumo Logic up 50%
- JFrog up 65%
- GoodRx up 55%
Source: Renaissance Capital
It’s still growth over profitability
What about profitability? Of these, three (Snowflake, Unity Software, Sumo Logic) are losing money, while JFrog and GoodRx are profitable, Smith tells me.
Regardless, it’s growth that matters.
“The bottom line is, investors are still chasing growth,” Smith told me. “The risk is that whatever they say they are going to do in the road show, they better do it and show a path to profitability.”
Why is software so dominant? The work-from-home phenomenon is forcing companies to modernize their tech infrastructure, so everyone from retailers to banks to law firms and doctor’s offices need to upgrade.
“What this virus has done is accelerate ten years of change into six months.” Pat Healy, who advises companies going public with Issuer Network. “These are tools that help people work remotely, and demand for these tools is going through the roof.”
A magic mushroom IPO?
Finally, in a sea of tech offerings, there is one odd-man out: Compass Pathways (CMPS), a UK-based company that is seeking to market a psilocybin-based therapy for depression.
Psilocybin? As in psychedelic mushrooms? Yep, that’s it.
I guess Timothy Leary was right.
“This gives new meaning to a market high,” one trader quipped.
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