The End of the IPO as We Know It?
marker.medium.com
marker.medium.com
"Public markets didn't like a few bad Softbank backed IPOs. This clearly is not because only Masayoshi Son loves giant bonfires they can shovel cash into, but instead means that public markets are just horribly broken, and everything we think we know about finance, economics, and the market is wrong."
After listing a bunch of loss-making stinkers (Uber, Lyft, Peloton, Pinterest, Caspar) we get the line:
> How is it that the hottest growth companies have stumbled out of the gate?
If you have to ask the question of why public markets might not think a company whose business strategy is mailing people mattresses below cost is worth a billion dollars, then really, you're not going to understand the answer.
Also, note this:
> And B2B player Zoom, the videoconferencing software company, which had a juicy pop of 72% on its first day of trading, has seen its fortunes seesaw, falling from a high of $102 to roughly $88 at press time, even as the broader market, especially the tech sector, has been on a tear.
Zoom is one of the only actual profitable companies discussed, but the author tosses them into the list of disasters like WeWork. But let's unpack that: They IPOed at $36 a share, and they're down to $88, and the lesson here is "oh man, public markets hate startups"? ...like, really?
The entire article is just one long "wow, profitable companies are valuable, I wonder what deeper lesson entirely unrelated to profitably we can draw from this if we ignore the obvious answer".
> But as they watch the public drubbing suffered by the likes of Adam Neumann [...] founders are more apt to see themselves as mistreated and even harassed by various gatekeepers
If you are a founder, and the person you feel the closest kinship too is Adam Neumann, you probably don't deserve to be treated very well by the markets. The issue is you.
What a infuriatingly obtuse article.
Like, no one's gonna write a whole medium post about "Companies with crappy business models get low valuations. Companies with good business models get better valuations"...
Valuation is hard, and the article's whole fascination with IPO's is about the idea that the people setting the initial price will find out how wrong they were on the first day. There's a fetish for being hoping they were lowballing, and people rush in to pay more, such that the lucky first in line make a big score in a few hours.
Even if people pay attention to fundamentals, it's tricky. It's not unreasonable for a company to try to raise money before they turn a profit. But so many people turn it into kabbala, dismissing any notion that the returns are related to the company's future earnings, instead looking to the runes to guess what other people's guesses are going to be.
I'm not just worried about that, though. If we accept these numbers (which I mostly got from Bloomberg and Wikipedia), we're saying that a $100 million infusion of cash propelled the company to $10 billion market cap in only 3 years. And looking at the balance sheet: $330 million revenue in 2019. Net income $7.58 million. Total assets: $355 million. Total liabilities: $202 million. Annual operating expenses: $51 million.
So I'm seeing a company with a $10 billion market cap, with earnings of $7 million a year, and about 2 years worth of operating expenses in assets after liabilities are taken into consideration. So I'm wondering what fueled that 10x increase in 3 years. Because on paper I don't think I'd be touching it with a 10 foot pole at it's price. It seems like only its promise to be the next Google or Amazon is what's keeping the price high.
So that's what worries me about IPOs. People are expecting massive multipliers and even when they get them, some people are upset. But these massive IPOs also seem to be super fragile (at least in principal -- I have no idea if Zoom will be the next big thing or not). It doesn't seem like they are doing anything near the business necessary to justify their market positions. So I worry that someday the emperor will notice he has no clothes...
That said, worrying about how too much money will ruin the stock market is like worrying about how too much proportionality will ruin democracy.
There's always genuine uncertainty in the value of $X and even more uncertainty about how it will be distributed, so there's room for real speculation. But "too much" is reached where even a broad index fund would perform poorly because the price is bid up by speculation rather than investment.
> If so much money flows in that your share of $X is worth less than some other investment, you're making a bad choice.
Or not. Who knows. If it were that easy to know people wouldn't do this. Stocks are fickle, but liquid and with almost no transaction price. Buying and setting up a stop loss is easy. (Even if placing the limit order has a fee.)
It's not a pyramid scheme. At best you might call it a pump-and-dump. But what's the problem with that? The people buying the share for its expected spot price rise are not dumb. They are just rich fools, with bad timing, because were they the first ones to buy and later sell, they would be very rich fools.
Who cares how an index fund performs. If the price signal gets so bad people will stop pumping money into the stock market. Just let them play their idiotic games. It's just froth. Sloshing back and forth.
The underlying economy is solid, it grows at a steady pace (minus the occasional recessions).
The problem is of course that the benefits of that real growth take an awful long time to trickle down into meaningful changes due to ... sociopolitics.
My intention was to point out the limits. The stock market can only hold so much money (for a given set of companies). Precisely how much, I can't say, and of course it's constantly growing (both from existing company growth and adding new companies.
In particular I can't say if we're beyond that point or not. I do think we're getting close: the P/E ratio of the S&P 500 is over 23 at the moment. That corresponds to getting 3% interest on an investment. That's a crude measure, of course, but an indicator that new money coming into the market might be better invested elsewhere.
In theory the market should/will optimize, maximizing opportunities, which in turn basically turns everything into the same risk-weighted-yield-wise. (After all, if there's enough information, depth, participants, liquidity, low transaction costs, then people will go after whatever market niche they may find.)
So, yes, there's a limit of how much money should be in stocks, but my belief/theory is that the investing market is very good at figuring this out (in the grand scheme of things).
That being said:
This has nothing to do with IPOs. Zoom IPOed at a much more reasonable price, and the public market (rightly or wrongly) has decided Zoom has a great future. This is all well past the IPO process, has nothing to do with investment banks or greenshoes or the first day bounce or any of that. So while yes, you can poke around public markets and find things that look mispriced, that's just a thing that happens (and has always happened) in public markets. (Also, history suggests it's a lot harder to correctly identify bubbles than you'd think...)
In other words, I don't think your wrong, but I'm not sure there's anything systemic here. Saudi Arabia has a lot of money, they want to invest it, they're not super good at finding investment opportunities, so they've managed to throw some of it away on dumb things like robotic pizza trucks, or buying Adam Neumann a lot of houses. That's bad (for the investors), and weird (for all of us watching from the sidelines), but I don't know that it means much.
Two weeks after the article it is up to 105.51 pre-market for Monday 2nd March after a high of 120.54 Friday 28th Feb. Now while there resurgence has happened due to COVID-19 it's still there.
This is a good thing. The number doesn't always need to go up. Especially when it's all bullshit.
Babies don't have to invent their toys from scratch, huh?
You're conflating evolution with education. Education also varies from one generation to the next as the educators learn from their own experience, or are imposed upon by government in curricula and standardisation.
>2019 IPO Market: Better Than the Headlines
and literally says:
> beyond these headline-grabbing disappointments, the IPO market had a mostly good year.
If you're going to write a boring cherry-picked article making the case the sky is falling, here's a tip: Don't literally cite research that says "The data says the sky isn't falling even though people are writing articles about it"
Shouldn't we be talking about the opposite of this article. If IPOs are not making great returns, shouldn't that indicate VCs are dying, not IPOs? Of course it doesn't matter because IPOs are fine and so are VCs.
Price increases are macro driven or trading and execution or business distribution factor sensitive appreciation. There's no real economic growth. I am presently held from advancing my own business because such a incredible burden of anecdotal evidence that's my direct experience has accumulated until I realised only this year that I am duty bound to account for and attempt to report the findings however that may be possible, before committing to a major investment. I owe my partners my experience and that's become a consideration under my employment contract as my responsibility to so do. At least I am sure I will not be imprudent if I do spend the necessary time in writing. Health forced me into a prolonged period of sabbatical and I am changed by my experiences. I genuinely fear for a complete paralysed economy and not even paralysis is correct nomenclature because that word implies a otherwise viable body capable of resuscitation. I think we killed capitalism as we thought we knew it and we have all become parasitic unknowingly and blind to the ways we so became. I suffered memory loss from a head trauma and actually had to somehow reboot my system for thought about every aspect of my life. My business was all consuming to my near death by self neglect and the upshot is I regained or just gained a humanity I cannot believe but know was horribly diminished if not lost over almost thirty years pursuing a ridiculous ambition without any rest. I never noticed the time passing but I was matrix style patched in to the business world and ignorant of everything else. Learning about business and economic opportunities from scratch in much needed normal conditions instead of catapulted from a exclusive education has confronted me with a sense of total terror at the frailty of our economic civilisation. Even more frightening and yet optimistic I discovered that the communities of computing nerds actually are most attuned to global risks and dangers. Which means that the most important knowledge is altogether compartmented separately from political potential for action. This isn't non obvious of course but I think it's a different level of separation from forty years ago and now the majority of logical arguments are happening apart from mainstream media and society. Because every science is become just "tech news" as if they saw the world of science through a Slashdot filter