Recent Tech IPO's and the Matter of Timing

One of the important considerations in pricing any IPO or follow-on is timing. Over the last two weeks we saw three IPO’s in the technology space (ARM, Instacart and Klaviyo).? Each was priced with special attention being paid to valuation relative to peers and a real sense of conservativism given the drought in large tech IPO’s over the last 18 months. Each IPO performed well out of the gate and yet each one has quickly come back to within percentage points of the original pricing despite looking relatively inexpensive, and having the underwriters’ confidence in diligence that near-term results would validate the near-term valuation.? So what happened?

Time always presents risk. Often, the longer you wait, the more can go wrong. In this case however, there was much to consider in the 10-15 days following pricing.? To that end, the banks and the companies certainly discussed the advantages and risks of pricing so close to 1) an important Fed meeting; 2) the end of the quarter for mutual and hedge funds who then will report their returns to their investors; and 3) the end of the quarter for most public companies which will be followed by earnings season.?

The market has not been great since the NASDAQ Composite reached it’s YTD high in July, which coincided with June earnings reports where the big tech companies did well, but the rest of the sector was much more mixed.? The stock market has been losing momentum since then, and economic indicators have weakened as well, with the consumer retrenching, credit starting to weaken, and oil prices rising again. With that backdrop, mutual fund and hedge fund portfolio managers had to be somewhat concerned with how these IPO’s might fare, especially in front of a Fed meeting that has been climbing the wall of worry fearing “higher for longer”. ?

With a stock market that has done surprisingly well this year but weakening technically; quarterly earnings that may reflect a weaker consumer and the effects of a strong dollar; and forward guidance where companies may not want to stick their necks out heading into the end of the year; portfolio managers certainly were incentivized to take profits if these IPO’s opened up strongly, especially as they wanted to protect returns heading into their own quarter-end.? And as we now can see, this is pretty much what happened as each of the three IPOs have retreated markedly.

The underwriter for each of the IPOs that is serving as the stabilization agent now has their work cut out for them as they try to stabilize each stock.? They have 30 days from pricing date to be in the market to buoy the stocks. It might end up being an expensive proposition as the equity markets test near-term support.?

The lesson here is that there is no perfect time to price, and that there are always events on the horizon in any given market environment.? Each one of these companies has a strong business and will earn their valuation over the coming years.? Still, these are important conversations to have, and approaching the risk/reward by evaluating how fund managers are thinking and handicapping that, is critical to evaluating both the right price for the IPO as well as how to allocate the stock.

Happy to discuss. #ipo advisor #equitycapitalmarkets