By Timothy J. Keating – 218 and beyond. With the six IPOs that priced last night (including the Hilton Worldwide $2.4 billion offering), the total number of IPOs completed in 2013 is now above and beyond the 217 IPOs that priced in 2004, and the most since 2000. (Note: Except where noted, all IPO data in this article are sourced from Renaissance Capital and based on their calculation methodology.) For a more recent comparison, there were 128 IPOs priced in 2012, and 125 in 2011. We have at long last broken the post-2000 bubble period IPO record—though an uninspiring hurdle, to be sure.
Of course, the comparisons to the pre-bubble period of the 1990s are a bit daunting. In 2000, there were 406 IPOs. And—get this—84 of these IPOs doubled on the first day of trading. To put the number of 84 in context, there were only 94 IPOs in 2008 and 2009—combined. More on this subject of first day doubles later.
But back to the present. 2013 has been a blockbuster year for IPOs.
But before we get to the rest of the market, let’s give Twitter (TWTR) its due and then move on, because 2013 was about a lot more than Twitter.
On November 6th, Twitter raised $1.8 billion in its IPO at $26 per share, well above its initial $17-20, and then upwardly revised $23-25, price range, and then closed up 73% on its first day of trading. It was the fourth largest IPO of 2013—behind Plains GP Holdings’ $2.8 billion (PAGP), Hilton Worldwide’s $2.4 billion (HLT), and Zoetis’ $2.2 billion (ZTS) IPOs.
Although the year is not quite over, let’s do a quick statistical recap of the U.S. IPO market in 2013 thus far, inclusive of the six IPOs that were priced yesterday.
• Peak week. The 13 IPO pricings in the week of November 4th were the most in a week since November 2007.
• Peak month. October was the busiest month for IPOs since 2007, with 30 companies raising more than $12 billion. November was the third consecutive month with at least 20 IPOs—the longest such streak since 2006.
• Peak filings. There have been 239 IPOs filed year-to-date, an increase of 80% from this time last year.
• Peak number of IPOs. As mentioned earlier, the 218 IPOs in 2013 thus far represents a post-bubble high and is an increase of 72% from the number of IPOs priced at this time last year.
• Peak gross proceeds. The $53.5 billion in gross proceeds raised in 2013 is the most since the $48.7 billion in 2007, and an increase of 27% from this time last year.
• Peak sector. There have been 54 healthcare IPOs this year, the most in any industry. The tie for the silver medal goes to financial services and technology with 44 IPOs each. Of particular note within healthcare is the 36 biotech IPOs that have raised over $2.5 billion in gross proceeds. These numbers eclipse the 26 biotech IPOs and $1.9 billion in gross proceeds raised in 2000—at the height of the tech bubble. Moreover, the total gross proceeds raised by biotech companies in IPOs in 2013 exceeds the amount raised in IPOs for the biotech sector in the previous five years combined.
• Peak performance. The average IPO has produced an average return of 31% (as measured from offer price to yesterday’s close). There are 21 companies with year-to-date returns in excess of 100%. Insys Therapeutics (INSY) is top of the class of 2013 with a year-to-date gain of—drum roll, please—480%.
• Peak first day pops. The average first day IPO “pop” has been 17%—the highest in at least 10 years.
• Peak first day doubles. Thus far, the stocks of six companies doubled on their first day of trading. Members of this club include: Sprouts Framers Market (SFM, +123%), voxeljet (VJET, +122%), Potbelly (PBPB, +120%), Noodles & Company (NDLS, +104%), Benefitfocus (BNFT +102%) and last, but certainly not least, The Container Store (TCS, +101%). To put this type of performance in perspective, from 2001 to 2012 there were only eight companies that doubled on the first day. This represents a mere 0.5% of all IPOs priced during that 12-year span.
So should we be worried that, as a November 10th headline in the Wall Street Journal article suggested, the “New-Issue Flurry Hints at Trouble for Markets”? The short answer: no. Why? Two reasons. First, the IPO market is now only recovering from a lousy 10-year stretch where we averaged a pitiful 139 IPOs per year—a fraction of the 440 or so IPOs annually during the decade of the 1990s. Second, equity valuations are above historic averages, but not alarmingly so. Let’s try to give context to each of these numbers.
How should one judge what constitutes a reasonable number of IPOs in a given year? Here’s one way to think about it. Every year, a certain number of public companies are delisted for a variety of reasons including mergers and acquisitions, bankruptcies and going private. In fact, the number of public companies in the U.S. has been in a steady state of decline for the past 15 years. During this period, the number of exchange-listed stocks has declined from over 8,500 in 1997, to just a little over 5,000 at the end of 2012—a drop of about 40%.
This works out to an attrition rate of about 230 exchange listed companies annually. So, a number somewhere in the range of 200-250 IPOs per year is the replacement rate required just to maintain the existing number of public companies at an overall level of about 5,000. Thus, even if we were to reach 250 IPOs in 2013, there is hardly any cause for alarm.
But what about the equity market, which seems to go up every day? Shouldn’t we be concerned about another bubble forming? Again, numbers can tell us the real story. Let’s begin with a look at valuations.
Based on a conventional metric of trailing earnings, over the last 80 years or so the S&P 500 has traded at an average price-to-earnings multiple of about 16x. Currently, we’re at about 18x—which is about 13% above average, but hardly a sky-is-falling scenario either. Also, we need to consider the current interest rate environment to put multiples and relative value in better perspective. Based on estimated S&P 500 earnings of $110 for 2013, and a recent index price of just under 1,800, the earnings yield is about 6.2%. This compares to a current 10-year Treasury yield of 2.8%. And one could very plausibly argue that on this relative basis, and with interest rates with nowhere to go but up, stocks actually look cheap.
Finally, in the “New-Issue Flurry Hints at Trouble for Markets” camp, the Cassandras point to a marked uptick in the percentage of unprofitable companies going public.
Based on research conducted by IPO expert and University of Florida Professor Jay Ritter, approximately 60% of IPOs this year have been for money-losing companies. That is the highest of any year since 1975, aside from 1999 and 2000, the height of the tech-stock bubble. The average for the past decade is 47%.
But that increase is largely due to a surge in biotech IPOs. Outside biotech, few companies are going public with less than $50 million in sales.
So now let’s try to bring our analysis full circle.
Large public companies are struggling to grow their top lines. In a slow growth economy with full stock market valuations and no competition from fixed income, public investors are—and almost assuredly always will be—willing to pay a premium for the 20-30%+ expected revenue growth that is typical of many venture capital-backed technology companies that have recently gone public.
This year’s hot IPO market is not a bubble. Rather, it is a welcome recovery of the vital new issue machine that drives the economy and creates jobs, but which has been in the doldrums for most of the last dozen years. Barring the normal shocks that happen to the stock market from time to time and which are perfectly normal, expect the IPO market to remain strong for the foreseeable future.
Timothy J. Keating is the CEO of Keating Capital, Inc. (Nasdaq: KIPO), a publicly-traded closed-end fund that specializes in making pre-IPO investments in emerging growth companies that are committed to and capable of becoming public. Keating Investments, LLC is an SEC-registered investment adviser that is the external investment adviser to Keating Capital. Mr. Keating can be reached via email at email@example.com.
The opinions and observations expressed herein are solely those of Timothy J. Keating and are intended to provide insights on the IPO market at large and at the current time. None of these opinions and observations should be construed as relating to any specific portfolio company held by Keating Capital (including the future IPO timing or plans of any such portfolio companies). This article is not intended to be a solicitation to purchase or sell any security (including Keating Capital). Neither Timothy J. Keating, Keating Capital nor Keating Investments, currently own, or have plans to purchase, the shares of any company referenced herein.