Valuation Circus: The 2019 IPO Market

 The Initial Public Offering (IPO) market over the past 12 months has been an exciting roller coaster, with unprecedented success stories alongside subpar performances. Amongst the newest public companies on Wall Street, there are a variety of business models, markets and philosophies at play. Beyond Meat has disrupted the consumer goods market with an innovative, well-researched take on a traditional product (plant-based meat substitutes), with a combination of strategic branding in established distribution channels that has already entrenched itself in the market over just 10 years of existence. This exciting new offer in an old industry contrasts with IPOs like Uber, a stalwart in the new sector known as the “sharing economy”. Platform economics on the digital level is a new business model yet unproven during prolonged periods of economic distress, leaving investors excited yet skeptical. Throughout all of this turmoil, investors have been struggling with how to approach to valuations for these companies.

Though it has not officially gone public yet, and there are loads of other issues currently occupying the headlines, WeWork made waves with their announcement that SoftBank sought  $47 billion valuation for the company on the public markets. But, before they got anywhere with such a high market position, their valuation was publicly slashed to $20 billion (Brown).  WeWork is a disruptive concept that offers shared professional spaces optimized for collaboration across companies. It fosters much easier access to office space, and thanks to their efforts the allocation of space has grown much more efficient across multiple continents. It represents the revolutionary idea of the sharing economy wholeheartedly disrupting the professional world, expanding beyond the consumer-centric platforms of Uber and AirBnB into the large market for business demand. But the hard numbers have done little more than make Wall Street cringe, and their staggering losses and overwhelming debt (Farrell) make it difficult to justify the value that SoftBank initially saw in WeWork from a long-term investor’s standpoint. 

A similar story can be found in platforms like Uber that have actually gone public but have been subject to negative responses as a result of their most recent earnings reports. On the first day of trading, many of Uber’s hopes were smashed when their expected $120 billion valuation fell to $76 billion, without a whole lot of good news to report between then and now. The company was hurt especially bad when their share price fell 12% on poor Q2 earnings in August (Driebusch). Despite continued praise as one of the most groundbreaking inventions of the technological age, it is clear that the direction of this company is unknown, and Wall Street remains confused on what value they see for Uber’s future.

The past month has seen negative responses to companies that are similarly new and exciting[1] [2] , but who are involved in the enterprise software industry – CrowdStrike and Zoom. In short, enterprise software, like the sharing economy, is an idea that has existed for a long time but has exploded in conjunction with our technologically driven world. Enterprise software essentially functions as a computer program optimized for a given company’s internal use, and Crowdstrike and Zoom have crafted a platform that allows them to more fluidly adapt to all business needs. Enterprise software is not as mature as other sectors, but has a strong track record of introducing trustworthy companies with recurring revenues and outstanding scalability.[3]  Thus, when these 2 promising companies came along, investors were happy to jump on the opportunity to invest (their shares have grown 57% and 111% respectively). However, this past month has seen investors selling their shares, indicating that they are struggling in understanding how to proceed with both of these companies, and what value they have to offer. Both reported better-than-expected earnings and increased their yearly forecasts in their most recent earnings reports, and they are projected to maintain incredible sales growth. However, investors began a sell-off that has not seen a recovery (Reuters). This is expected to continue, as Zoom is currently trading with a P/E in the thousands, with the forward metric expected to reach ~450 in due time (MarketWatch).

There is still plenty of positive aspects of companies like CrowdStrike and Zoom, alongside other cloud-based platforms. They carry very low capital intensity and are incredibly scalable, and as such are much more attractive than larger innovative companies like Uber. But this most recent correction is definitely a return to Earth moment across Wall Street. They illustrate an investor pool that is unsure of itself, and who are unclear about what they see in this IPO market. People like SoftBank are so excited to get on a platform and discuss their newest investments that are sure to change the world (Sherman), and many investors are excited to back them at the start. They recognize the realities of our digital age, and are hoping to make those rumored astronomical returns on the hottest new products. But there is an entire other side to these investors, one that is entrenched in hard data and proven value, that is hard to control in this period of relative uncertainty. This is the internal battle that has been manifested in front of our eyes over the past couple of months. Platform economics and the cloud are new concepts, ones that many that are used to old and mature ways of doing business may be unfamiliar with. The tug of war between “revolutionary” and “unproven” has continued to define th[4] e share price and valuation of newly-founded companies in all sectors since their introduction to the broader public, and has the potential to make or break the newest digital revolution.

The one success story that, through a couple of brief ups and downs, has remained strong is Beyond Meat. BYND exploded out of the gate (Reinicke), and has surged from its initial $25 price to around $150, from most recent data. As a matter of fact, Beyond Meat was actually falling victim to a similar trends within the latest companies to go public like CrowdStrike and Zoom, but it's share price jumped most recently on news of a partnership with McDonalds[5] . Their disruptive innovations and unique branding coupled with their market share and customer growth to satisfy both sides of the Street, and they have created a profile of a well-led company with a model that has been proven (for the time being) to maintain their higher price into the future.

Beyond Meat’s continued presence shows that, with regards to these fancy new ideas, it is not simply that Wall Street is incredibly fickle with their pursuits – they are merely impulsive, and hoping to find the next diamond in the rough at any cost. With other companies that have seen more negative trends, Wall Street has woken up to realize the prospect of slowing growth and not as much value in a concept they had originally perceived to be “the next big thing”. This is not the case for Beyond Meat, who even when it seemed like it could befall a similar fate, it has continued to fight for its right to remain relevant and continued to innovate and expand its partnerships. Investors are hoping for this sort of activity on the part of companies. Not only are Beyond Meat’s product offerings new and exciting, but they will continue to be relevant through the executives’ intelligent and deliberate expansion that will entrench itself into the lives of an increasing customer base. This contrasts quite heavily with Uber’s borderline obnoxious spending habits and the incompetent leadership at WeWork to justify buying into Beyond Meat – their initial predictions about a solid company with plenty of room to grow are coming true.

This is not to say that I myself am against any of these companies. I personally have used Zoom quite often to communicate with my boss, and I am certainly like most of my peers in using Uber quite often to get around. It has been great to see these platforms grow, but I am fearful of their future prospects, given the slowing economy and impending recession within the United States alongside other growth and geopolitical concerns abroad. I urge these companies to take a solid look at their financials and their strategies going forward, in order to maintain this excitement and exceed their hype in any possible environment.

Works Cited

Brown, Eliot and Farrell, Maureen. "WeWork Weighs Slashing Valuation by More Than Half Amid IPO Skepticism." The Wall Street Journal, September 5th 2019. https://www.wsj.com/articles/wework-parent-weighs-slashing-its-valuation-roughly-in-half-11567689174

Driebusch, Corrie. "Uber Is Latest Firm to Flounder Post-IPO." The Wall Street Journal, August 9, 2019. https://www.wsj.com/articles/uber-is-latest-firm-to-flounder-post-ipo-11565366522?mod=article_inline

Farrell, Maureen. "WeWork IPO Filing Reveals Huge Revenue and Losses." The Wall Street Journal, August 14, 2019. https://www.wsj.com/articles/wework-ipo-filing-reveals-huge-revenue-and-losses-11565783212?mod=article_inline

Kamich, Bruce. "Zoom Video Could Zoom in on Lower Prices Soon." Real Money, September 10, 2019. https://realmoney.thestreet.com/investing/stocks/zoom-video-could-zoom-in-on-lower-prices-soon-15084916?puc=CNBC&cm_ven=CNBC

Reinicke, Carmen. "Beyond Meat is going bananas, surging to a more than 550% gain since pricing its IPO (BYND)." Markets Insider, June 10, 2019. https://markets.businessinsider.com/news/stocks/beyond-meat-stock-price-up-475-since-pricing-ipo-2019-6-1028266607

Reuters. "High-flying IPO stocks sell off after quarterly results." CNBC, September 6, 2019. https://www.cnbc.com/2019/09/06/high-flying-ipo-stocks-sell-off-after-quarterly-results.html

Savitz, Eric. "IPOs Have Been Crushed in 2019. Why That's Actually Good News for Stocks." Barron's, September 27, 2019. https://www.barrons.com/articles/ipo-market-wework-uber-peloton-51569631194

Sherman, Alex. "Masayoshi Son’s unyielding optimism — and lack of challengers — led SoftBank to overvalue WeWork, sources say." CNBC, September 25, 2019. https://www.cnbc.com/2019/09/25/why-softbank-and-masa-son-overvalued-wework.html

Stanton, Alexandra. "Where companies go wrong on valuation." Quartz, September 26, 2019. https://qz.com/work/1713186/valuation-in-the-year-of-the-tech-ipo/

Taylor, Kate. "3 factors are driving the plant-based 'meat' revolution as analysts predict companies like Beyond Meat and Impossible Foods could explode into a $140 billion industry." Business Insider, May 24, 2019. https://www.businessinsider.com/meat-substitutes-impossible-foods-beyond-meat-sales-skyrocket-2019-5?utm_source=markets&utm_medium=ingest?utm_source=markets&utm_medium=ingest

Witkowski, Wallace. "Zoom Video's sky-high valuation to face earnings scrutiny." MarketWatch, September 5, 2019. https://www.marketwatch.com/story/zoom-videos-sky-high-valuation-to-face-earnings-scrutiny-2019-09-04