Last week’s initial public offering by Lending Club served as a year-end exhibit of the warm embrace that many newly issued stocks have received all year.
The peer-to-peer lender saw its shares rise 56% above their IPO price on its first day of trading, and as The Wall Street Journal pointed out, its finishing position had the company’s valuation more in line with high-tech companies than the banks and other financial companies it is seeking to displace.1
At a market valuation of $8.5 billion, the stock is trading at more than 50 times what underwriting bank analysts estimate the company will earn in 2017, the Journal said.
That’s in line with where smaller but rapidly growing Internet companies, such as Zillow and Yelp, trade, the Journal noted, and is roughly double the valuation at which other firms that facilitate financial transactions, such as Visa and MasterCard, currently trade.
Perhaps the tech-stock parallel is apt, though, given that investors in that sector were also spending last week showing that they were willing to pay big premiums for IPOs that offered the promise of high growth.
Two venture-backed cloud computing stocks, Hortonworks and New Relic, began trading on Friday and racked up gains of more than 40% in one session after pricing initially above their IPO ranges.2
As the Journal pointed out, these generous valuations for rapid growth come even without the requirement of having to yet generate a profit.
Hortonworks, whose sales doubled year-over-year in each of its last two quarters, was trading at about 23 times trailing revenue last Friday. New Relic’s growth has averaged 84% in its past two quarters – it was trading at about 18 times. Such multiples are similar to those enjoyed by other high-growth cloud companies including Workday, NetSuite, and Zendesk, the Journal said.
Such fawning could encourage Silicon Valley’s growing club of closely held technology firms that sport billion-dollar-plus valuations from their venture-capital backers, according to the Journal. Many of these companies are ostensibly waiting for market conditions that can support justify those valuations. Box, which provides cloud-based storage services, said in an updated filing last week that revenue growth averaged 76% in the past two quarters. With that came continued operating losses, but it’s fair to ask – does anyone care?
While 2013 may have marked the revival of US IPOs, 2014 confirmed the pipeline’s staying power. According to an Ernst & Young report released last week, with 288 deals 2014 will end with record activity. Even excluding December, the number of listings was at its highest point since 2007 and is a 27% increase over 2013.3
IPO listings in 2014 also raised 54% more capital than in 2013.
While the fourth quarter saw a pause in the markets after Alibaba’s listing, E&Y said IPO investments remained strong throughout the end of the year given the lack of alternative investment options and low interest rates.
In addition, as stock markets have been trending higher, IPOs, always a highly volatile group, have recently been outperforming market indices. Companies that have listed on US exchanges in 2014 have averaged year-to-date returns of 27.8%, compared to the S&P 500 at 12.2%, according to the report.
The Recent IPOs motif has increased 9.7% so far in 2014. In that same time, the S&P 500 has gained 9.8%.
Over the past six months, the motif has risen 16.7%; the S&P 500 is up 3.7%.
At least for the immediate term, E&Y expects the robustness to continue. The report noted that more than 100 companies are ready to list in 2015, 60 of which are expected to go public and raise around $22 billion in the first quarter.
Although the firm believes pressure may eventually squeeze after-market performance, with the pricing gap between financial sponsors and institutional investors at a historically low level, the stage is set for the IPO window to remain open in the first quarter.
1Ianthe Jeanne Dugan, Corrie Driebusch and Telis Demos, “Lending Club Shares Surge In Market Debut,” wsj.com, Dec. 11, 2014.
2Dan Gallagher, “Investors Still Gush Over Growth in Tech IPOs,” wsj.com, Dec. 12, 2014.
3E&Y press release, “2014 realizes strongest US IPO numbers in over a decade,” ey.com, Dec. 10, 2014, http://www.ey.com/US/en/Newsroom/News-releases/news-2014-realizes-strongest-us-ipo-numbers-in-over-a-decade, (accessed Dec. 15, 2014).