Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
As One Medical looks to become the first venture-backed company to price its IPO in 2020 this afternoon and Casper aims to price its own shares next Wednesday, the market is gearing up for a pair of tests.
If you listen to the Nasdaq and the NYSE, IPO volume in 2020 will prove vibrant. A surprise, perhaps, in the wake of the WeWork meltdown that many had expected might reduce IPO cadence. One Medical and Casper, though, are charging ahead, meaning that their debuts will help set the tone for the 2020 IPO market.
If they struggle with weak pricing and slow initial trading, their disappointing offerings could slow the IPO market. If they price well and are welcomed by the street, however, the opposite.
Let’s take a look at how many IPOs are coming, what One Medical and Casper are hoping for and what their results might mean for unicorn liquidity. Don’t forget that we’re still living in the midst of a unicorn liquidity crisis — there are hundreds of private companies worth $1 billion or more around the world that need an exist, and the market is creating them faster than it can get them out the door. If IPOs stumble in 2020, lots just won’t make it out before the market turns.
An IPO crowd
Yesterday, CNBC reported notes from Nasdaq CEO Adena Friedman and NYSE President Stacey Cunningham, each speaking about their expected IPO cadence in 2020. Friedman said there are “lot of companies looking to tap the public markets in the first half,” implying a strong flow of potential debuts.
Similarly, Cunningham said that she has “roughly 30 or so companies that have already filed with the SEC [with] many more that are talking to us and looking to list in 2020.”
Gisting the comments together, there are likely dozens of companies looking to get public this year. That is little surprise, given the number of unicorns that need to get out before the market closes due to a macro shift or other shock to the system. The IPO market looks welcoming at the moment as tech shares are trading at record highs — major technology companies are largely pushing ahead to new, all-time prices, while SaaS and cloud stocks set price records of their own.
This makes the year’s first two IPOs all the more important. If they spoil all this well-laid ground, it will be quite the party foul. Here’s how that could happen.
Results and concerns
We’ve looked through One Medical’s IPO pricing and implied revenue multiples (here), and done the same with Casper. Earlier this week, we also stacked the companies’ two implied multiples next to each other and asked why the gap between the pair is as large as they anticipate.
As a refresher, it appears that One Medical is targeting a SaaS-ish revenue multiple, despite not having the gross margins or revenue repeatability that such a revenue multiple tends to demand. As the company is targeting an IPO valuation that would be up from its final private valuation, One Medical is shooting high.
That creates risk. Given its high price target, the company may price below its hopes, creating negative sentiment in the market. And if it is forced to price so low that its valuation falls under its final private valuation, it will have missed its targets and put together a dreaded “down IPO.” Casper Sleep, in retrospect, is already priced far under its final private valuation. So, what it needs to do is simply not price any lower and it will have no more impact on the coming IPO cycle.
After pricing comes trading. If the companies price well but trade poorly, that’s not great. If they price poorly and trade flat, that’s probably worse. And if the pair price low and then slip further, it’s awful.
There are a lot of eyes on these deals, as not every unicorn that hopes to go public this year is a tech company. Some are merely tech-enabled, like Casper and One Medical.
Now you know the test that is about to be graded and how it impacts many more companies than just our first two IPO candidates of the year. More tonight when One Medical is expected to price.