IPO boom has opened the window for some scary companies
A stunning number of companies are trying to jump through the current hot market for initial public offerings, but investors would be wise to watch for rats hoping to sneak in amid the torrent.
We are in the middle of annual summer lull in the IPO market, with only one offering pricing last week and none expected this week, and the break is welcome. According to Renaissance Capital, more companies went public in the second quarter of 2018 than any quarter in the past three years, with 60 IPOs raising $13.1 billion, and quarterly proceeds exceeded every quarter from 2015 through 2017.
“Technology stole the show, averaging a stellar 61% average return, and boosting the quarterly average gain to 29%,” Renaissance said in its quarterly review. Renaissance does research on IPOs and manages the Renaissance IPO ETF IPO, +0.83% , up 6.1% this year, faring better than the S&P 500 SPX, +0.88% , up 2.4%.
June was the busiest month in three years, with a flurry of deals at the end of the month, including seven IPOs on the last Thursday of the month alone. In the first half of 2018, a total of 105 IPOs priced, up 36.4% from the same time last year, according to Renaissance.
“The market doing as well as it is doing is a huge factor,” said Barrett Daniels, co-founder and chief executive of Nextstep Advisory Services, which consults companies on going public. “The market conditions are ripe for this. Clearly the IPO market is open for good companies.”
It may be open for bad companies too, however. The last week of June was an example of some of the not-so-hot deals: Smaller health-care and biotech companies like Neuronetics Inc. STIM, -1.53% which attempts to use magnets to cure depression; a little-known ride-hailing tech company called HyreCar Inc. HYRE, -5.74%; BJ’s Warehouse Club Holdings Inc. BJ, +0.93% a sad, second-rate competitor to stronger retailers like Costco Wholesale Corp.COST, +0.63% ; and capping the week was the controversial cloud software company, Domo Inc.DOMO, -4.34%DOMO, -4.34%which managed a decent first-day surge of more than 10% even after a slew of press in recent weeks questioning its financial statements, cash-burn rate and corporate governance practices. Shares tumbled 10% last Monday and continued to fall throughout the holiday-shortened week, but were still above the $21 IPO price at Friday’s close.
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Renaissance noted that with the average tech IPO up 60% from its offer price, “many IPO investors will see that trend and buy all tech IPOs, without paying too much attention to what’s under the covers.”
“There is a bit of trying to get in before the summer lull,” said Lise Buyer, founder and CEO of Class V Group, which advises companies on the IPO process. “The market has been on quite a tear since early 2017 that I think there is some concern the rally is getting long in the tooth. Some of the volume we are seeing now is from those who may want to get out while the getting is good.”
That isn’t stopping them from getting out, and getting good returns: Some of the companies that went public in recent weeks were not known at all until they filed their regulatory paperwork, but most did well in their first few trading days.
For example, HyreCar, founded in 2014 in Los Angeles, matches Uber and Lyft drivers with owners of idle cars to rent, but its wobbly financial statements indicate that it is not the hottest company in ride-hailing. HyreCar’s main business is providing gap insurance for drivers in between their Lyft or Uber pickups, when they are off the ride-hailing platforms, with revenue also from a rental transaction fee and insurance fees. Drivers cannot decline the HyreCar insurance, and the company has two providers, one of which is American Business Insurance Services, a small insurer in nearby Westlake, Calif. HyreCar said the president of its primary auto insurer is also a minority shareholder in the company, and HyreCar currently owes the insurer a 2017 debt of $337,882.
HyreCar has big expenses and its losses are increasing. In the March quarter it had a net loss of nearly $1.8 million on revenue of $1.7 million and its cost of revenue was $1.3 million, up from a net loss of $823,230 on revenue of $505,325 in the year-ago period. Its IPO was relatively small, pricing its shares at $5, and it raised $12.5 million. Its shares jumped as high as $6.50 during its first trading day, with some investors possibly seeing the company as a way to get into the ride-hailing space, since Uber Technologies is not expected to go public until next year at the earliest. But on Friday, its shares fell 6% and it closed below its IPO price at $4.70.
More from Therese: The government tried to encourage IPOs, but it helped create The Age of the Unicorn
Many aiming for equity markets right now are not young startups like HyreCar, but older companies that have found it difficult to continue raising venture capital as they get long in the tooth, but haven’t managed to find an acquirer. Some of these are actually decent deals, such as a raft of older cloud-focused companies with solid financial performance.
Then there is Bloom Energy Corp. BE, +0.00% , which emerged with much fanfare in 2010 for a highly orchestrated appearance on “60 Minutes,” touting board member Colin Powell, the former secretary of state, and early customers like Alphabet Inc.’s GOOG, +1.22%GOOGL, +1.06% Google and eBay Inc. EBAY, +1.39% . (Google was its first customer, while eBay was the location for the company’s huge initial debut press conference — read more about that here.)
Oddly, neither company is mentioned in Bloom’s S-1 filling, and a case study on eBay using Bloom Energy boxes has disappeared from Bloom’s website. Officials at eBay did not immediately respond to a query and it is not clear if those companies are still Bloom customers.
Read also: Five things you need to know about Bloom Energy’s IPO
It shouldn’t be surprising that Bloom is not selling itself like it did in 2010, because the company has been a mess, judging by its IPO filing. Bloom, which sells what it says are clean-energy servers in a box, has a total $2.3 billion deficit since its founding in 2001 and has a whopping debt pile of $950.5 million. The company was going to go public in 2016 with a confidential filing, but put the plans on hold after a federal subsidy that enabled tax credits for alternative energy systems was allowed to expire under the Trump administration.
Bloom lowered its prices to make up for customers’ loss of the tax credits, which hurt its revenue in 2017. Those tax credits were restored in the tax bill that passed late last year, which has led to strong revenue growth numbers for 2018 for Bloom, but those numbers are definitely misleading given the tax-credit issue from 2017.
Bloom appears desperate for cash, as it seeks to raise up to a quarter-billion dollars at a valuation of about $1.5 billion. Its interest expense in 2017 was $108.6 million, but its cash and equivalents totaled $88.2 million at the end of March, with $154.6 million in working capital. It’s also worth pointing out that Bloom gets its revenue from a small group of customers.
“In 2017, our top 20 customers accounted for approximately 91% of our total revenue and two customers accounted for approximately 53% of our total revenue,” Bloom said in its regulatory filing. Those customers include AT&T T, -0.09% , Caltech, Delmarva Power & Light Company, Equinix Inc. EQIX, -0.72% , Home Depot HD, +0.82% Kaiser Permanente and the Wonderful Company.
Bloom was an early favorite among the “green energy” startups in Silicon Valley, but a few critics — including the Institute for Energy Research — have asked if Bloom is really that green, since its power generators rely on natural gas. One harsh critic has even suggested that Bloom has a few similarities with Theranos, the once-hyped and now nearly defunct blood-testing company.
A clean-energy company that may not be that clean, is nearly broke with a gigantic pile of debt, and is reliant on tax credits and a handful of customers for survival; in any other market, it would be nearly impossible to get this type of IPO through, but with investors’ appetites for IPOs moving from appetizer-sized to a voracious buffet, these are the kinds of companies that come running.
Investors should carefully monitor the performance of some of the riskier deals over the next few weeks before deciding to take the plunge. If the market keeps up its current pace, there will surely be more dicey deals ahead.
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