If you have been waiting for a certain company to go public this year, don’t hold your breath.

2016 has had the lowest level of annual initial public offerings (IPOs) since 2009.

Renaissance Capital reported only 43 U.S. IPOs so far in 2016, which is 59% fewer than the year before.

This hasn’t always been the case — the 1990s and 2000s were known as the “IPO boom.” Companies were rushing to make their initial public offering because they believed that was the only way they could make a real profit.

2009 saw the lowest number of IPOs thanks to the extreme decline in the major stock indexes. On March 6, 2009, the S&P 500 reached the Hadean low of 666. At that time, it made sense for companies to be hesitant about going public.

2016 is nowhere near 2009’s lowest low. Right now, the major stock indexes have been doing just fine even with a slow start to the beginning of the year. The S&P 500 closed at 2,159.04 on September 12, 2016.

Behind the Decline

Some factors behind this year’s decline of annual IPOs are overinvestment from startups, startups deciding to stay private longer, and the weak performances of 2015 IPOs.

Overinvestment

There has been a gradual increase of unicorn and decacorn companies. Unicorn companies are privately held companies with valuations that exceed $1 billion — and decacorn companies’ valuations exceed $10 billion.

These companies want to accrue a certain level of valuation before making a public offer. If they’re receiving money from investors and increasing their valuation, then there isn’t a strong incentive to go public until they’re 100% ready.

Staying Private Longer

In 1999, the average age of a company going public was four years, and in 2014 that average age increased to 11 years. Most companies, especially tech companies, want to grow their business before going public.

A company might not want to go public right away because they’re not ready for the expenses that go along with going public or the time-consuming responsibilities of providing required quarterly financial reports and conference calls for shareholders. 

Not to mention, they become very concerned with meeting their earnings expectations because if they don’t meet them, they run the risk of shareholders selling off their stock. 

Weak Performances

Weak performances from recent IPOs have also played a huge role in the decrease of IPOs for 2016.

In May 2016, the average return for a 2015 IPO stock was negative 19%.

Companies that were slightly interested in going public are rethinking that idea, especially since they’ve been witnessing 2015 IPOs perform terribly.

Instead, it would be a lot safer to stay private and continue to grow their businesses and earn more money from investors.

After all, no company wants to end up like Twitter (NYSE: TWTR).

The company made its public offer in November 2013. Twitter’s IPO was highly anticipated and was priced around $26, but since then the stock has fluctuated significantly, and last month it reached a low of $21.

Investors are valuing companies that go public differently from when they were private, forcing companies to put off their IPOs until their businesses are mature enough and can withstand the market and investors.

Onwards and Upwards?

As we’re in the last half of the year and all three major indexes have reached records in the past few weeks, we’ve been seeing some IPO successes.

One huge success (that’ll hopefully bring on a wave of tech IPOs) comes from Twilio (NYSE: TWLO), a web-based communications technology company. In June, it started selling shares at $15, and it now trades at $55.95.

Another tech company that’s bringing life back to the IPO market is a software company called Talend SA (NASDAQ: TLND). It’s seen a 46% increase since its IPO.

Brett Paschke, head of Equity Capital Markets at investment banking firm William Blair & Co., said this:

While relatively few in number, the strong aftermarket performance of these offerings is reinforcing the demand… we are seeing many companies making preparation to launch and expected a more active IPO market in the coming months.

Both of these companies have good revenue growth, positive cash flow, and a flourishing demand. And on top of that, the market has been doing pretty well.

These two companies are proving that it might be a good time for any company that’s been teasing the idea of going public to make its offer… as long as the company meets the same criteria that’s made Twilio and Talend successful IPOs.

We still don’t have the big-name tech IPO candidates like Uber, Airbnb, Spotify, and Snapchat saying anything about when they’ll make any public offerings, and it’s possible that we might not hear anything from them in 2016, but if all goes well in 2017’s market, I think we can expect these companies to make some noise.

Until next time,

Jennifer Clark
Pro Trader Today