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 Alibaba's IPO, which could come as soon as Sept. 19, could raise
more than $21 billion and claim Facebook Inc's <FB.O> title of
biggest tech IPO. It will usher in a fall season when plenty of new
names sell shares for the first time in the U.S. market.
Returns from IPOs so far this year have been mixed. Some analysts
say large swaths of the market, especially biotechnology stocks, are
frothy.
The percentage of IPOs coming from money-losing companies has jumped
to a 14-year high, according to Jay Ritter, a professor of finance
and leading scholar of IPOs at the University of Florida.
The mixed financial results could dim enthusiasm for some of the hot
names coming later this year, including web hosting company GoDaddy,
airline Virgin America, and possibly burger chain Shake Shack, which
has been exploring an IPO.
Roughly one-third of the 188 stocks that debuted this year are
selling below their IPO price. New stocks have risen an average of
19 percent over the first three months of trading, compared with 36
percent in 2013, and 23 percent in 2012, according to research firm
Dealogic in New York.
“With the exception of mature companies like Alibaba, a lot of the
companies that have all the hype around them tend to underperform
beyond the first day. They just get squeezed to valuations that are
beyond what they can absorb,” said Kathleen Smith, who manages
Greenwich, Connecticut-based Renaissance Capital's IPO ETF <IPO.A>.
MediWound Ltd <MDWD.O>, a biopharmaceutical company, serves as a
cautionary tale. Its shares down 60 percent from the first closing
price.
In perhaps the year's biggest flop, shares of King Digital
Entertainment Plc <KING.K>, the maker of mobile game "Candy Crush
Saga," have tumbled more than 29 percent since going public in
March.
"Remember how a few years ago, everyone had Angry Birds? That seems
so 1998 now. These things run on a life cycle, and you need new
things in the content pipeline all the time,” said Jim O'Donnell,
chief investment officer at San Francisco-based Forward, which has
$5 billion in assets under management.
Some of the IPOs from late last year, including casual dining chain
Potbelly Corp <PBPB.O>, have also sunk. Potbelly is down 60 percent
from its first-day close.
Given the underwhelming performance of several high-profile IPOs in
recent months, some analysts worry investor appetite for risk is
reaching unsustainable levels.
Much of the influx of money-losing companies comes from one sector,
biotechnology, where investors tolerate spotty track records in
hopes of cashing in on lucrative payouts.
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While some investors find their bets rewarded, as in the case of
UltraGenyx Pharmaceutical Inc <RARE.O>, which is up 176 percent from
its IPO price, others are disappointed. Three of the five worst
performing IPOs of 2014 are in biotechnology. "They’re essentially
looking at companies that don’t have much in the way of revenue or
profit and hoping to see that one big blockbuster drug approval or
pharma company buyout," said Jeff Reeves, editor of
InvestorPlace.com in Rockville, Maryland.
Yet even excluding biotech, IPOs look rich. Offer prices have been
about 50 percent higher this year than the average from 2001 to
2013, even as median sales declined to $136.2 million from $187.3
million in the year before the companies go public, according to
Ritter.
Experts say the stock market's gains, with the S&P 500 <.SPX>
topping 2,000 for the first time last month, are somewhat
responsible for the appetite for risk. And with the U.S. Federal
Reserve keeping rates low, investors seeking growth are attracted to
more untested companies.
"Individual investors' appetite for risk will be predicated on the
economic backdrop. If they think the Fed will continue to be
accommodating, they'll be more apt to want to take risks on IPOs,"
said Joel Guth, chief executive officer of Gryphon Financial
Partners, a member of the HighTower Network.
Still, there are some indications investors are becoming cautious.
In the second quarter, stocks rose an average of 9.2 percent on
their first day of trading. In each of the three quarters before
that, stocks popped about 20 percent.
That could mean the torrent of companies slated for IPOS in the next
few months, like restaurant-arcade chain Dave & Buster's
Entertainment and peer-to-peer banker LendingClub, will be met with
more skepticism.
“When valuations are at their highest level in years, at some point,
there’s going to be a correction,” Ritter said.
(Additional reporting by Ryan Vlastelica)
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