- Airbnb delayed its IPO amid the market turmoil but has refiled for a launch this year.
- Palantir is also looking to go public.
- Both these companies may be looking to cash out thanks to high stock valuations right now.
One of the few victims of the stock marketbesides Warren Buffett for his failure to capitalize on the downturnappears to be in the IPO field.
Short for initial public offerings, an IPO is when a company goes from being privately held by founders to held by a legion of day traders who want a piece of the action, sold to them via investment banks for a hefty fee.
IPO Market Resurgence a Sign of Normalizing Financial Markets
The biggest expected IPO this year was Airbnb, which put plans on hold back in March. The short-term rental app company made a confidential filing this month, the first step to going public. Now that its refiled, shares could be in your portfolio by the end of 2020.
Of course, things arent as good as they seem. When the company first announced, it had a valuation of $31 billion.
Even with a reduced valuation, Airbnb is still poised to be the second-largest hospitality chain should it go public. | Source: Luxuryabode.com
Today, the companys value is closer to $18 billion.
Also joining the list is Peter Theils Palantir, which may also file and trade by the end of this year. Palantir isnt as well known, as its been somewhat private about its business practices.
It also doesnt help that the company is a government contractor, and uses big data to try and do things like predict crime.
The company is somewhat secretive, but from what we do know, Palantir is far ahead of other big-data companies on the data it collects. | Source: Quora
Palantir has an estimated valuation near $20 billion, on par with Airbnbs reduced value. That would make for a massive IPO.
Why Go Public Now?
The real question investors should ask themselves in any IPO is qui bono, or who benefits?
A companys largest owners by the time they go public are the founders, employees who took a risk on a startup in exchange for stock, and often angel and early investors such as private equity and hedge funds.
Once a company has its IPO, all those groups have an exit plan to cash out the increased value of their shares.
Even better, publicly-traded companies tend to trade at a premium to privately-held companies. Private equity deals to buy non-public companies typically dont pay more than ten times EBITDA.
Thats far less than the 29 times earnings that the average S&P 500 stock trades at right now.
Currently, the S&P 500 is trading at about twice its historical average on an earnings basis, although the PE ratio does tend to surge during recessions. | Source: Multpl.com
So, going public allows a company to see a significant surge in valuation that enriches existing shareholders even more.
Put it all together, and the fact that company insiders are looking to cash out now may be in recognition of todays high market valuations.
That bodes poorly for investors looking for a quick return. While IPOs often set a trading price low enough to ensure a good day, some IPOs dont fare well, leading to immediate losses.
Even Facebook (NASDAQ:FB) struggled for months as the company had to start looking for ways to increase revenues and earnings once it was a publicly-traded company.
Of course, if todays crazy markets have taught company CFOs anything, its that a flagging share price can be immediately reversed with the announcement of a reverse split.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.
Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.
Last modified: August 16, 2020 4:37 PM UTC