Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Last week we noted that the IPO window was open, a seemingly incongruous reality when compared to stark unemployment figures in the country and what they would seem to bode for business health. But as the markets rise to near-record highs, it has become clear that investors are open to buying new, growth-oriented shares.
Our concluding point last week was simple: The open IPO window and its implied investor sentiment was good news for unicorns. The richly valued, private companies tend to lose more money than they would if they wanted to go public in normal times. But with the IPO window open today for more than merely profitable companies, surely it’s open for unicorns as well?
New evidence suggests so. This morning, let’s explore Vroom’s new IPO pricing and why the digital used car marketplace’s ability to charge more for its equity than the company initially expected bodes well for itself and other money-losing unicorns that may have feared the IPO window was shut for the rest of 2020.
New pricing, same margins
On Friday, Vroom changed its expected IPO price range from $15 to $17 per share and raised it to $18 to $20 per share. The number of shares the firm intends to sell in its debut — 21,562,500 — remained unchanged. The pricing change pushed Vroom’s maximum gross raise from $366.6 million to $431.3 million, a huge increase for the unprofitable business.
What is this unicorn worth at its new prices? Using its anticipated share count (that excludes equity set aside for possible purchase by its backing banks) here’s the math:
- Old pricing: $1.69 billion at $15 per share, to $1.91 billion at $17 per share.
- New pricing: $2.02 billion at $18 per share, to $2.25 billion at $20 per share.
Vroom could see a comfortable +$300 million in value thanks to the pricing change.
Normally we’d compare the new valuations to Vroom’s final private valuation — $1.45 billion, per Crunchbase data — and call it a day. But this particular price raise is super dang interesting, so we have to do a little more work.
To understand why, observe some of the basic financial facts regarding Vroom:
- The company’s gross margin fell from 7.1% in 2018 to 4.9% in 2019.
- Due to COVID-19, Vroom’s gross margin per vehicle fell 30% in April compared to March of this year.
- The company’s net losses (not counting accretion of redeemable convertible preferred stock) rose from $85.2 million in 2018 to $143 million in 2019.
- Vroom’s deficits are still rising, with the company’s Q1 2019 losses of $27.1 million falling far short of its 2019 net loss of $41.1 million (again discounting accretion of redeemable convertible preferred stock costs).
- All of which investors appear willing to downplay provided that the company continues to produce lots of growth. The company’s Q1 revenue grew from $235.1 million in 2019 to $375.8 million (+60%) in 2020.
What we have here, then, is not merely another unprofitable unicorn. We have a very low-margin, unprofitable unicorn that is still drawing enough investor interest to raise its IPO range. My read? This means that growth is once again hot as hell.
The short-term flight to quality, cash and profitability feels very passé in light of Vroom’s new pricing range.
IPOs are strange beasts and things could still go sideways. There’s no guarantee that Vroom will manage to price inside its raised range; it could still disappoint.
That doesn’t look too likely. So what we have here is a company that fits several unicorn rubrics — growth, rising losses — that the public market is welcoming with open arms. So, why not, if you are a unicorn worried about having enough cash to make it another year or two as a private company, go public? If Vroom can to such a response why not you?
More when Vroom prices later today.