The good news about IPO failures
In recent months, the Australian and US markets have seen a number of Initial Public Offering (IPOs) pulled before they could more obviously fail. Among the non-starters have been Latitude Financial Group, WeWork, MPC Kinetic and Retail Zoo, parent company of Boost Juice. Others, such as Uber, Lyft and fitness start-up Peloton, launched but promptly lost value.
The reasons have varied, but Fortune Magazine notes that: “there’s been a huge disparity between private and public valuations for many companies, and some in the private market are growing skeptical.”
Business Insider Australia cites weak profit margins, investor skittishness over the market’s big picture, and investors moving away from brands with more theatrical taglines (like Peloton’s “we sell happiness”) than fundamentally strong valuations. That old notion that you can launch an IPO and “sell the story” is clearly broken.
In days past, the market has gone gung-ho for IPOs that turned out to have little substance or staying power: for example the late 20th century dot.com bubble, where that newfangled Internet inflamed excessive speculation. The bubble burst worldwide in 2000 when internet companies had spent too much and investors started to notice.
Investors often like IPOs as an investment strategy, because usually, their value increases significantly in their first few months, providing an opportunity for profit in the short term. Long term investors, however, are looking at offerings earnings, profits and long-term sustainability rather than hyperbole surrounding expected results.
The recent failure of these IPOs for companies seen as having weak fundamentals and inflated valuation is actually good news for the market, which will be stronger and more sustainable for their absence. A severe market correction may be avoided in the future.
If you would like to speak with a professional investment adviser about how your investment strategy for the year ahead, contact United Global Capital today on 03 8657 7640 or email info@ugc.net.au for a no cost, no obligation consultation.