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These companies are planning gigantic IPOs. The market might stop them

Anxiety on Wall Street may not bode well for high-profile private companies that hope to go public this year...

Posted: Jan 3, 2019 5:09 PM
Updated: Jan 3, 2019 5:09 PM

Anxiety on Wall Street may not bode well for high-profile private companies that hope to go public this year.

Uber and Lyft have confidentially filed initial public offering documents with the Securities and Exchange Commission, which means more details about their financials should be available for investors within the coming months.

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The two could debut on Wall Street by late spring or early summer. Their IPOs would be gigantic: Uber was last valued at $72 billion, while Lyft was recently valued at $15 billion.

Airbnb, WeWork and Pinterest, which are all valued at $10 billion at least, are also rumored to be considering an IPO this year.

With a growing number of economists predicting at least a minor recession by 2020, it may make sense for these companies to go public now before a downturn in the broader markets makes those plans untenable.

But a volatile stock market could still scare some of them away from launching an IPO. The problems plaguing Facebook and some other tech darlings might also serve as a cautionary tale.

Year of the unicorn?

Some think that the twists and turns in the broader market may lead smaller companies that had been contemplating an IPO to hold off for a bit. But the market would have to drop much further to cause the top private companies to delay their IPO plans.

"We could see fewer — but bigger IPOs — this year. The unicorns may be more insulated unless the broader market gets even more volatile," said Matt Kennedy, senior IPO market strategist at Renaissance Capital, a provider of institutional IPO research.

That's why Kennedy said investors are correct to be focusing on the two US ridesharing companies as the top IPO candidates for 2019.

"Uber and Lyft are the headlines. But If a company has good fundamentals it will get interest," Kennedy said. "There are a large number of companies that have prepared for IPOs by getting their financials in order."

Kennedy thinks home fitness equipment company Peloton, mattress maker Casper and plant-based food company Beyond Meat could make a splash on Wall Street. Beyond Meat filed for an IPO in November.

Other experts are also optimistic that the IPO window will eventually open up later this year.

"The volatility will remain for a bit and elongate the timeline for an IPO," said Jared Carmel, managing partner with Manhattan Venture Partners, a firm that researches and invests in private companies.

"But it's also our belief that this won't last forever. The market is just taking a breather," added Carmel, who said his company currently has stakes in Lyft, Palantir, Airbnb and subscription clothing firm Rent the Runway.

Carmel said it's important for investors to look closely at the fundamentals and valuations of any private companies that consider an IPO.

He noted his firm decided to invest in Lyft, not Uber, because the latter was too expensive and had some high profile problems during the tenure of former CEO Travis Kalanick.

"Uber is priced to perfection and it's not a perfect company," Carmel said, although he added that Uber has taken promising steps since Dara Khosrowshahi took over as CEO. He cited the company's decision to scale back in some international markets and invest more in its UberEats food delivery service.

Reasons for skepticism

One analyst warned investors to not get too infatuated with the biggest unicorns. Several splashy private companies have recently gone public and have quickly fallen out of favor on Wall Street.

Scott Kessler, director of equity research with CFRA, pointed out that Spotify (SPOT) has plunged since its IPO last year. Snapchat parent Snap (SNAP) also went public with much fanfare in 2017 and its stock has subsequently tanked.

Twitter (TWTR) is nowhere near the highs it hit shortly after its IPO more than five years ago. And even Facebook (FB) has run into some big problems lately.

"There are not a lot of high profile IPOs that have been runaway successes," Kessler said.

The recent market volatility may also be a reason why the likes of Uber, Airbnb and others have waited so long to go public in the first place.

Silicon Valley is more willing to tolerate the growing pains of startup firms than Wall Street is. That's why some big startups seem to be opting for strategic investments instead of outright IPOs.

E-cigarette giant Juul just sold a 35% stake to Marlboro owner Altria (MO), for example. And Fortnite creator Epic Games is 40% owned by Chinese gaming giant Tencent.

"A lot of these big private companies don't see the benefits of being public," Kessler said. "For many, there are multiple negatives. There is much more scrutiny."

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