IPO Season is Open: Time to Hunt for a Unicorn?

Last week, the iconic American fashion company Levi Strauss returned to public markets after more than three decades of private ownership. Shares surged 30% on the day of the initial public offering (IPO), pushing investor hopes even higher for the more than 300 US companies expected to go public. Excitement is particularly high around Unicorns –private start-ups valued at more than $1 billion –such as Lyft, AirBnB, and Uber. Named for their rarity, such companies are hard to find and usually draw a great deal of attention when their shares are opened to the public for the first time. Despite worries of a flattening yield curve, believed by many to signal a recession is imminent, Goldman Sachs expects future filings to generate a record $80 billion for 2019. This is largely thanks to these Unicorn IPOs, as investors’ fear of missing out leads them overlook profitability in favour of user growth as they race to take part in ‘the next big thing’. Buying shares in a Unicorn IPO is a risky move, but can pay off handsomely in the long-run. Something for this year’s investment groups? Let’s have a look at what’s on offer…

This year is looking like a historical one for companies engaged in the sharing economy. Ride-hailing app Lyft went public on Friday 29th March at an initial valuation of $20.5 billion, with shares being priced at the upper end of their expected range. Upon market open, shares jumped almost 20% from their opening price. This comes as no surprise, given that the order book for the company’s shares was filled within 24 hours amid strong investor demand. Though Lyft is now in the spotlight, having become the first US ride-hailing service to go public, even more hype can be expected from the yet-to-be-announced IPO of its arch-rival Uber. With 39% of the US ride-hailing market, Lyft has a lower penetration than Uber and has yet to turn a profit. Meanwhile, Uber continues to grow at an astonishing rate, generating revenues of $11.3 billion in 2018 and achieving four times as many customers as Lyft. The still privately-owned ride-hailing giant is speculated to achieve a valuation of over $100 billion when it goes public.

AirBnB is another sharing-economy Unicorn that is expected to go public in the foreseeable future. The home-sharing platform is already causing a big headache to traditional hotels, having captured more spending by US consumers than the industry giant Hilton in 2018. AirBnB has been profitable for the past two years, generating 2.6 billion in sales for 2017 and almost $4 billion in private funding. Its growth is unlikely to slowdown anytime soon, with a whopping 500 million guests expected by first quarter 2019. However, many are concerned of growing competition from the likes of Booking.com and Expedia as they pursue their own ‘alternative accommodations’ strategies. Others fear regulatory backlashes; in Amsterdam, for example, landlords using the AirBnB platform to offer their entire home are restricted to renting out their property for a maximum of 30 days per year and cannot host more than four adults per location. Nevertheless, AirBnB’s disruptive nature and wide coverage will certainly make its IPO one to keep an eye on.

Pinterest is also in the headlines after it filed for an IPO. The image sharing app has 265 million monthly users and showed strong financial performance, with revenues jumping 60% from $473 million in 2017 to $756 million in 2018. Meanwhile, losses halved to $63 million last year as it continues along the path to profitability.  Another tech-related Unicorn to keep an eye on is Slack, the workplace messaging app which can be seen as WhatsApp for professional use. Unlike the others, however, Slack intends to perform a direct listing as opposed to an IPO. In a direct listing, such as that of Spotify last year, no new shares are issued and as such no new capital is raised from turning to the public market.

These Unicorns coming to public markets presents an interesting but risky opportunity for investors, particularly given the turbulence and uncertainty of current markets. Nevertheless, it is likely that these Unicorns will achieve high valuations upon their debut as investors buy into their promise of future earnings. However, investors should acknowledge a possible post-IPO hangover when hype turns to doubt as markets no longer buy the story–and with painful consequences.  Snap, the maker of popular social media app Snapchat, serves as an adequate example. Despite shares going public at $17 and quickly soaring 50% on the first day of trading, even investors who managed to get their hands on shares at their debut price would be hurting as the stock sank to less than $5 at the end of 2018. So investors beware; Unicorns may look pretty, but their horns can hurt!

Written by: Jasper Thouin