The last few months have been a difficult time for new companies coming to market, both in London and across the Atlantic.
Three prominent initial public offerings (IPOs) on London’s main market, Amigo Holdings PLC (LON:AMGO), Funding Circle Holdings PLC (LON:PCH) and car maker Aston Martin Lagonda Global Holdings PLC (LON:AML), are all currently trading lower than their offer prices despite much fanfare at the time of their floats.
Aston Martin has had a particularly stinking rebuke from investors after it began trading in early October last year, with the share price having lost more than 50% of its value.
In trying to draw a connection between these sub-par showings, it could be the case that the roadmap for some of them just wasn’t clear enough to stand up to market scrutiny.
Neil Wilson, chief market analyst at Markets.com, said that companies like Amigo and Funding Circle had “dubious financial models” which gave off a lot of uncertainty around their future cash flows.
Aston suffered a similar problem, Wilson adds, saying the company came to market “thinking it was going to be the next Ferrari” but didn’t have a clear strategy for how it was going to deliver on its ambitious plans.
“The common theme is uncertainty around future cash flows, earnings and profitability” Wilson said, with Uber and Lyft also falling into the category as it was “impossible to value them accurately”.
Falling off the hype train
Another potential connection is that companies may have inflated their valuations due to the popularity of their brands and increased media attention before suffering from the cold hard maths of the market.
“[The companies] sort of believed their own hype, they put up a big valuation because they expect people to buy it and obviously it doesn’t always work out like that”, Wilson says.
“As soon as you float you get much better price discovery and the market tells you what it really is worth”.
Aston Martin is particularly guilty of this, with its pitch as a luxury car brand trickling down into its valuation and giving it a market cap at IPO of £4.3bn which has since dropped to less than £2bn.
The group was also put in its place by Deutsche Bank, who in an April note said the firm lacked the prestige of Ferrari and instead compared it to less premium rival BMW.
Is it just bad luck?
However, despite talk of over-hyped valuations and murky business models, the litany of IPO flops could simply be down to macroeconomic bad luck.
Many of the recent floats were planned during 2018 when markets were reaching all-time highs only to fall back going into 2019 as uncertainty over Brexit, the US-China trade war and general global economic malaise all dampened investor enthusiasm.
Aston Martin in particular has been hard hit by the Chinese slowdown, Wilson says, as the world’s second largest economy is one of its key growth markets.
Wilson added that the broader economic uncertainty also had implications for Uber’s float.
“If Uber had [floated] a year ago…the shares wouldn’t have fallen like that. The market is a lot more scared now.”
But investors still have appetite
While these high-profile misfortunes may have many thinking that investors have had enough of IPOs, there have been a number of recent success stories.
Video conferencing firm Zoom Video Communications Inc (NASDAQ:ZM) IPO’d on the stock market in mid-April at US$36 per share, and since then has seen the price climb around 100% and netted the company US$751mln.
London has also seen a recent profitable float from café chain Loungers PLC (LON:LGRS), which IPO’d onto the junior AIM market at the end of April and is currently trading around 11% higher than its 200p offer price.