The IPO story gets complicated
Happy Friday and welcome back. Let's start with a situational awareness:
- Wells Fargo announced current BNY Mellon CEO Charles Scharf will take over as its CEO starting Oct. 21.
- Chicago teachers voted to launch a strike against the third-largest U.S. public school district as soon as next month.
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1 big thing: The IPO story gets complicated
By: Dan Primack • Newsletter: Axios Pro Rata
Public market investors have become less willing to leave their comfort zones, and it's manifesting most obviously in the IPO market.
The big picture: Novel disruption has fallen out of favor, with many preferring more time-tested models like enterprise SaaS and biotech.
- Peloton yesterday raised over $1.1 billion in its IPO, pricing at the top of its $26-$29 range, but its shares then got crushed (although still valued well above the last private mark). Its CEO talked to Axios yesterday about the falling stock price.
- Endeavor, the live events and artist representation firm led by Ari Emanuel, last night canceled an IPO that originally was to raise over $600 million, before it was later downsized.
- WeWork... well, you know the story there.
Yes, all three companies have dual-class shares. Yes, all three were highly valued by venture capital or private equity investors. Yes, all three were unprofitable for the first half of 2019.
- Those characteristics are also true of Datadog and Ping Identity, both of which had successful IPOs this month and continue to trade above offering.
The trio's real similarity was that each had a very complicated story.
- Peloton is a high-end hardware and SaaS business that produces original media content, sells apparel, and runs its own delivery logistics.
- Endeavor began life representing movie stars and Donald Trump, but later expanded into a massive live events business that includes the UFC and Professional Bull Riders. Plus, it's got a streaming platform.
- WeWork... again, it's different.
All of this comes against the backdrop of Uber, which also had a very complicated story and an IPO that emboldened short-sellers.
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2. Trump is hurting the market
By: Felix Salmon • Newsletter: Axios Edge
Illustration: Sarah Grillo/Axios
The "tweet" button on President Trump's iPhone is moving markets and has become increasingly consequential for trillions of dollars of assets around the globe.
Why it matters: The markets don't trust Trump — nor his Treasury secretary, Steven Mnuchin — to be a calming influence in times of stress.
- Quite the opposite: They now expect Trump to be an unsettling influence even when things are otherwise quiet. And they're worried that even the Fed is falling under Trump's spell.
What they're saying: A new paper from the National Bureau of Economic Research finds that whenever Trump tweets about interest rates, the market prices in a little bit more of a future rate cut.
Market participants believe that the Fed will succumb to the political pressure from the President. — Francesco Bianchi, Howard Kung, and Thilo Kind, NBER
JP Morgan's Volfefe index demonstrates that Trump's tweets have also increased volatility in the futures market more broadly.
My thought bubble: The markets normally look to the U.S. Treasury secretary for reassurance during difficult times, but as WaPo's Tory Newmyer says, Mnuchin is "Trump's most loyal surrogate." When Mnuchin weighs in on issues like Trump's conversations with Ukrainian president Volodymyr Zelensky, that damages his credibility more broadly.
- Trump's fiscal policy is also adding to market volatility. The Trump tax cuts have caused trillion-dollar deficits, which means the government has a huge and constant thirst for free cash. That in turn exacerbates liquidity shortages like the one we saw last week.
The bottom line: The stock market has done a pretty good job of shrugging off Trump's tweets, most of the time. But money markets — the places where businesses keep most of their cash — are much more important for a smooth-functioning economy than the stock market is. And they're showing increasing signs of concern.
Go deeper: But on social media, Trump's tweets are losing their potency
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3. Balance sheets and profits seem to matter to investors again
By: Dion Rabouin • Newsletter: Axios Markets
Illustration: Aïda Amer/Axios
The mood has shifted and balance sheets and profits seem to matter to equity investors again, as the recent debuts of large, money-losing companies have been punished by the market.
Driving the news: Shares of smart stationary bike company Peloton opened down 7% and closed 11% below their $29 IPO price to mark the third-worst performance for an IPO that raised more than $1 billion since the financial crisis, Bloomberg data showed.
- This is becoming a pattern.
- "While most of the 11 other companies that have gone public this month priced within or above their marketed range, the largest of them, SmileDirectClub is trading about 44% below its offer price in its $1.35 billion listing," Bloomberg notes.
Why it matters: As the U.S.-China trade war has intensified, triggering depressed economic data and heightened recession fears globally, investors have gotten more selective about what stocks they want to buy.
- Market leadership also has shifted from growth stocks to value plays as U.S. Treasury yields have plunged and investors seek out stocks that offer high dividends and have historically been less risky.
Between the lines: Peloton, like Lyft and Uber, is a company that loses more money as it grows.
- Company filings show Peloton lost $196 million on sales of $915 million during the 12 months ended June 30, after losing $48 million on $435 million in sales the prior year.
What they're saying: “We totally understand the sentiment today,” CFO Jill Woodworth told Bloomberg. “As I’ve seen over the last couple of decades, there’s always been different periods of time when people focus on growth and when people focus on profitability.”
- “It’s an interesting time in the markets,” CEO John Foley added. “There is anxiety. The markets are on edge.”
What they're not saying: Peloton may also be hurt by its dual-class share structure that gives certain owners, including its CEO, 20 votes for each share they own. Public investors only get 1 vote per share.
- In addition to being a tough pill for traders to swallow, the dual-class structure means the companies aren't listed in many index funds favored by passive investors, including the S&P 500 index.
- That's important as assets in U.S. index-based equity mutual funds and ETFs surpassed active stock funds for the first time ever this month.
The bottom line: The unimpressive market performance of Peloton, Lyft, Uber and SmileDirectClub has poured ice cold water on 2019's stock market IPO euphoria.
Go deeper: Peloton CEO John Foley on post-IPO falling stock price
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