Investors sometimes get an intense craving for fresh stocks. They may even go as far as lining up for them even before looking at the respective company’s books. Meeting that demand often comes with its own share of difficulties too. We saw several high-profile Initial Public Offerings (IPOs) in 2019. However, most of them didn’t live up to expectations. The possible evidence for this failure is that lack of confidence in the stock market didn’t increase even as indices rose.
Many investors paid a high price for the optimism of the dot-com bubble in the early 2000s. Since then, there have been countless recent examples of new companies replicating the incredible growth typical of that period. These are rarely manufacturing companies. More often, they’re part of the so-called digital economy. Likewise, in 2019, many well-known companies attempted to hold their own IPOs. Unfortunately, it didn’t go as well for them as they would’ve hoped. The fear of mishandling their initial offering forced many companies to cancel their plans to go public to avoid failure.
This aversion to risk, unfortunately, doesn’t help the market sentiment either. One of the high points of this negative stock market tendency was WeWork canceling its planned IPO. The market is extremely enticing as a method of acquiring capital for companies that either have a risky business model or are about to expand. If they can present an impressive plan with enough evidence, enthusiastic investors could provide them with the funds they need. Banks and institutional investors, on the other hand, are typically significantly more cautious. They’re less likely to be awed by just an enthusiastic business plan. When there’s a large amount of retail investor capital available and the risk appetite is high. Companies with aggressive growth strategies like Tesla, for example, can easily become the center of attention.
WeWork is another rapidly growing company. They style themselves as pioneers in the field of shared office workspaces. In reality, their profits are negative at worst and marginal at best. Their business model is also heavily dependent on high marketing costs. It’s a classic example of a company trying to price in their future instead of their present.
Another example: Slack
Many of these kinds of companies have attempted to take their place in the stock market. Before its IPO, Slack ([email protected]) proclaimed itself the company that will end the era of emails. This July, they entered the stock market through their initial offering to avoid the bank commercial loan process. Despite high expectations, their actual market performance was remarkably underwhelming. It’s now traded at $21, far below its initial $40 opening price. Ever since its introduction, the price of the stock has been on a continuous downward trend. While these companies are rising stars, they often face well-funded competition capable of quickly reacting to their challenge.
Slack suddenly found itself facing off against Microsoft Teams and the Facebook Workplace apps. Microsoft and Facebook approached competing with their up-and-coming rival from a completely different angle. Facebook Workplace already had more users than Slack last June, despite only having launched three years after.
The case of Slack is a perfect example of how companies who aim to overturn the economic status quo can sometimes grow fast enough to catch the attention of the big fish of their industry. Those major companies can radically worsen the outlook of those rising companies with a single decision. When that happens, the typical aftermath is that they start receiving offers for a buyout or other techniques to push them out of the market. Not even Tesla was an exception. After they exploded onto the scene with their brilliant innovations in the automotive industry, Porsche and other manufacturers also came out with new models that were in some regards superior to Tesla. These companies have a much easier time meeting customer needs due to their already established support networks. There are even some rumors about Daimler making an offer to buy out Tesla.
WeWork vs. The Stock Market
For now, let’s go back to the situation of WeWork’s stock market IPO, or rather its cancellation. It’s a network for sharing office spaces. It mainly targets small or new businesses. There is no shortage of capital among companies in the business of lending office space. WeWork’s growth could easily hit a dead-end if many other companies were to start copying their business model soon. At this point, they’re still a private company. They currently claim their company and assets are valued at a total of 47 billion dollars. However, when preparing for their IPO, the investment service provider estimated their value at only 15 billion dollars. This vast difference in evaluation is likely what dissuaded the company’s management from going public.
Those results were an example for overly optimistic managers to learn from. It forced them to carefully consider their strategy and put their respective company’s numbers in order before they can even think about going public with their stocks. The first lesson to learn is to not go public with companies still in a phase of expansion. Another consequence is that companies who wouldn’t receive credit from a bank won’t make it near a public offering. This’ll likely make the stock market’s pre-selection mechanism stronger and hopefully shepherd us towards less risky stocks.