It seems like a hundred years ago, but it’s been just a matter of weeks since we were all eyeing which companies would dare go public in a market that was already looking risky. Widely hyped tech startups like Robinhood, Instacart, Asana, and DoorDash looked like contenders; some were expected to attempt the hot direct listings instead of traditional IPOs. Perhaps most of all, everyone wanted to know how legendary super-unicorn Airbnb would fare in what was easily the most anticipated offering of the year.
But as you may have heard, things have changed. The bull market’s 11-year-run came to a gruesome end this March as the devastating human costs — and, secondarily, but acutely — economic costs of the Covid-19 pandemic came into full and undeniable view. Stocks plunged, a slew of companies warned that their earnings will be lower than expected, mass layoffs were predicted, entire industries feared being wiped out, and the IPO market suddenly became the IP-No market.
Consider Airbnb. The travel category is getting crushed, from airlines to hotels to online services. And Airbnb is no exception: Legions of travelers canceling their plans add up to a crisis for many of Airbnb’s “hosts,” and thus ultimately for the company itself, which makes money by collecting a cut of host revenues. A spokesman declined to comment on the company’s IPO plans, directing me to a September 2019 press release about its intention to become a publicly traded company in 2020.
Stocks plunged, a slew of companies warned that their earnings will be lower than expected, mass layoffs were predicted, entire industries feared being wiped out, and the IPO market suddenly became the IP-No market.
But obviously it’s not just Airbnb. At the moment, it might feel as if no company will ever go public again. That’s a good reason to step back and remember that we’ve seen IPO droughts before, including after the 2008 financial crash and the 2000 dot-com meltdown. But how long before a new company braves the public markets?
Not many are jumping at the chance to make that kind of prediction, but in mid-March, Renaissance Capital, a research and investment firm that specializes in tracking the IPO market, argued that it “may essentially shut down for months.” According to Kathleen Smith, a principal at Renaissance, there are a couple of big-picture indicators that companies might be ready to IPO again.
One is lower volatility. The Chicago Board Options Exchange’s Volatility Index, or VIX, gauges how much the market is anticipating potentially wild swings, based on S&P 500 futures. To over-simplify: Traders prefer it to be below 30, but after a quiet year in the teens, this index soared past that mark in February and now stands at around 75. In those conditions, Smith told me, “it’s really impossible to do an IPO.” And that won’t change until the VIX gets back below 30.
Last year, the New York Times reported on internal pressure from some Airbnb employees to bring the company public, not least because tranches of employee equity will begin to expire this November. So the stakes are high.
The second indicator is improved stock performance of the companies that have gone public recently. Over the past month, Renaissance’s own IPO index of newly public companies — which forms the basis of its exchange-traded fund — is down 31%, even worse than the 24% drop in the S&P 500 in the same period. Investors want to see that number trending positive for a sustained period — a month, let’s say.
But even if — or let’s just be upbeat and say when — the investor appetite for IPOs returns, that may not mean the time is right for any given company in any given sector. Here’s a look at how things stand for the industries with some of the year’s most highly-anticipated IPOs:
- TRAVEL: Let’s revisit Airbnb. Valued at $31 billion in a 2017 round, it seemed like a highly attractive candidate for a public offering, and was rumored to be considering a direct listing, allowing it to skirt investment bankers and let insiders sell shares directly to investors. Last year, the New York Times reported on internal pressure from some Airbnb employees to bring the company public, not least because tranches of employee equity will begin to expire this November. So the stakes are high. But company’s price relative to their peers, Smith notes, and the general travel market (along with share prices of the companies enmeshed in it) is likely to be down for a while. Moreover, it’s easy to imagine a traveler who — fairly or not — trusts a corporate hotel chain to provide a clean, virus-free room over a spare room in some rando’s house. Co-founder and CEO Brian Chesky told employees in a recent company memo: “Travel always bounces back.” But it’s not clear how long that will take. And now the company is reportedly considering another financing round from private investors.
- FINTECH: Another company whose specific prospects look a lot more complicated now than a couple of months ago is Robinhood. An app-based stock-trading service billed as democratizing access to the markets, Robinhood experienced severe outages during recent highly volatile stretches — precisely the moments when many of its customers most desperately wanted the thing to work. More broadly, the idea of access to stocks is probably going to be a lot less popular in the aftermath of a collapsed bull market.
- DELIVERY: The most intriguing category of potential IPO-ers may be the delivery businesses, notably Instacart and DoorDash. With government guidance — or flat-out laws — effectively ending the possibility of eating out in many locations, take-out and delivery options (DoorDash’s specialty) may be the last hope for legions of restaurants that have long complained about delivery services’ high commission fees. And in a quarantined world, grocery deliveries (Instacart’s business) obviously become more attractive to those who can afford it. But with shelter-in-place orders rippling across states, it’s hard to say whether that will continue in the future. And meanwhile the delivery category — which already had fraught relations with many of its gig-economy workers — may be facing a reckoning with that labor force. Both Instacart and DoorDash have announced they will provide “financial assistance” to deliverers who are quarantined or diagnosed with Covid-19. But that’s probably not the end of the issue, which will likely need a clearer resolution before any attempt to sell shares to the public.
- GROCERY: While other industries are reeling, grocery chains have been struggling to keep up with demand. Albertsons, another name on our speculative list, actually filed its IPO paperwork earlier this month. That does not mean it has to make its offering anytime soon — and in fact its timing at the moment looks exquisitely bad — but we’ll have to wait and see what the markets make of grocery stores in the pandemic era. In the short term, Barclays analyst Karen Short recently asserted in a research note that we could see a $100 billion shift in spending from restaurants to grocery stores. But in the longer term, fading demand and oversupply could end up pressuring profits. “The grocery sector is benefitting on the front end of this cycle, but will be meaningfully challenged on the back end,” Short wrote.
- RETAIL: At a time when consumers are frightened to, or simply being barred from, mingling in physical space, it’s no surprise that traditional retail is taking a big hit. Familiar names from Apple to Crate and Barrel to Aeropostale have announced they’ll be closing stores for a period of (at least) weeks. Trendy denim brand Madewell (part of J. Crew) has already announced that its IPO plans are on hold in early March (announcing at the time that “strong” fourth-quarter results presented a chance to explore “alternative” options), but it’s hard to see how anything that’s happened since then make the public markets look more attractive. After all, nobody is going anywhere at the moment, and no one’s sprucing up their wardrobe for a Zoom call.
- HEALTH CARE: Finally, there’s Oscar, a tech-centric health-care startup that recently put itself back in the news by announcing an online tool for locating Covid-19 testing sites. That seems innocuous enough. But Oscar’s co-founders include Jared Kushner’s brother Joshua, and it appears that Jared (who of course is a prominent adviser in the Trump administration) had a financial interest in the firm. This doesn’t make Oscar an important IPO candidate … but it does make it a buzzy one.
There’s one more factor that complicates the eventual return of the IPO market. Smith’s firm tracks likely IPO candidates, and had noted “many down rounds” in recent months. “The stress was building,” she says. Slashed valuations (as with mattress firm Casper) or scuttled offerings (like WeWork) meant the market was already vulnerable when the coronavirus, and an oil price war, slammed stocks across the board.
Smith suspects there will be a valuation contraction in the private markets along with the IPO dry spell. But eventually, it will end. “Some extremely strong and attractively valued companies come out of these times,” she says. “It feels like Death Valley days. But the oasis is out there. You just can’t see it yet.”