Is the IPO Market "Crushed"?
After yesterday's disastrous IPO from
King Digital Entertainment
) (down over 15% after the first day of trading), thoughts of
another IPO bubble are creeping into the minds of analysts, and
investors. The fear is that the markets are approaching the
same levels as the dot com boom, and the recent performance by
KING might be the needle that popped the proverbial
Over the past three years we have seen IPO's increasing year
over year; in 2013, there were 178 companies filed, raising $41.3
billion, in 2012, there were 102, raising $35.1 billion, and in
2011 there were 97 total IPO's, raising $28.7 billion. In
the final three quarters of 2013, there were 50 or more IPO's
each quarter, which has not been seen since 2000.
For 2014, there have been just over 50 companies, so far, that
have gone public in 2014; with the most coming from the Health
Care Industry (almost half), and the Technology being the second
The chart (chart 1) below compares the S&P 500 with the
two major IPO ETF's; Renaissance IPO ETF, and First Trust US IPO
Index Fund. As you can see, both ETF's have kept pace
with the S&P 500 Index over the past 4 months (First Trust
has been mirroring the S&P for more than a year), but in the
past month there has been a significant divergence from the
S&P 500 (chart 2)
This change, plus the recent beating KING took yesterday, has
analysts worried about the future growth of IPO's.
According to Renaissance Capital's Kathleen Smith (Principal
of Renaissance Capital) "We see signs of a bubble, but not nearly
what we saw in 1999-2000." She went on to say that we are
in the "Seventh Inning" of the bubble. She concluded by
saying, "We are at points in the market that are definitely
frothy. Investors have been outperforming the overall
market in post-IPO trading, and that's why we have such an
exuberant market right now."
Not all IPO's are failing like King Digital Entertainment; for
Nord Anglia Education
) offered an initial price of $16.00, and is currently trading at
$19.25 (a 20.31% increase). For that matter, of the seven
most recent IPO's 5 out of the 7 are showing double digit gains
from their initial IPO after a few days of trading with the other
two showing single digit losses.
Three companies debuted with their IPO's today;
TriNet Group Inc.
Applied Genetic Technologies Corp.
Square 1 Financial Inc.
) is a payroll services company, with an initial IPO of
$16.00. The initial offer was for 15 million shares.
As of 1:30 p.m. today, TriNet is up over 17%, currently trading
just under $19.00.
Applied Genetic Technologies Corp
), is a pre-clinical-stage biotechnical company that uses a
proprietary gene therapy for patients with severe inherited
orphan diseases in ophthalmology (eye diseases). Their
initial IPO was priced at $12.00 with 10 million shares
available. Currently, Applied Genetics has no products in
clinical trials. As of 1:30 p.m. today, Applied Genetic is
up over 23%, currently trading just below $15.00.
Square 1 Financial Inc.
), is a bank that provides banking and financial products and
services for Venture Capitalists, the Entrepreneurial community,
and private equity firms in the U.S. Their initial IPO
price was $18.00, with 5.9 million shares available. As of
1:30 p.m. today, Square 1 is up over 11%, currently trading just
Mixed Bag of Data
With the three IPO's for today experiencing double digit
growth in their first day of trading, the doom and gloom of IPO's
might be overblown. It appears as though the perceived
needle that popped the bubble (KING), might have just an anomaly
due to company specific issues.
In a recent discussion regarding IPO's in 2014, Chief Equity
Strategist John Blank of Zacks Investment Management, summed up
the issue very nicely. "Is the IPO market overheating?
Given the share prices in the publically traded market, and the
amount of cash piling up on corporate balance sheets, no.
Does it seem like an anomaly? I do think the last six years
have created this sense of siege. An IPO is hopeful and
optimistic. That is a good sign. And the siege
mentality could slowly lift with it."
So basically, the IPO market is not crashing, but like all
other investment vehicles, you need to make sure that the
companies that are filing IOP's have positive fundamentals, and
show potential for growth. Two things King Digital
Entertainment did not prove before their IPO yesterday.
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