No slowdown in sight for IPOs or SPACs
The market for new stocks continues to sizzle — with no signs of a slowdown for initial public offerings or special purpose acquisition company mergers.
Dating app Bumble enjoyed a strong debut, gaining nearly 65% in its IPO last week. Online commerce companies Affirm and Poshmark also did well after their IPOs in January.
The surges follow big jumps for Airbnb, DoorDash and Palantir when they began trading late last year. (Palantir chose to list shares directly instead of selling them in a more traditional IPO.)
The IPO market strength is global, too. Shares of iconic boot maker Dr. Martens and online greeting card company Moonpig both soared in London while Chinese video app Kuaishou, a rival to TikTok, more than doubled when it began trading in Hong Kong earlier this month.
More high-profile IPOs or direct listings are likely on the way this year, too. Gaming firm Roblox, Coinbase, Instacart, payments giant Stripe and, yes, even Robinhood, are likely to go public this year.
“Everyone right now that has the financials to go public are preparing to go public if the market remains strong. Conditions are still really good,”said Christopher Austin, a partner in the securities & capital markets and fintech practices at law firm Paul Hastings.
Move over IPOs? SPACs are all the rage on Wall Street
Investors continue to show interest in companies using blank check mergers with special purpose acquisition companies, or SPACs, to go public. Sustainable indoor farming company AppHarvest and sexual health and wellness firm Hims & Hers debuted this year via SPAC deals.
And rumors are rampant that electric car company Lucid Motors will soon go public via a merger with a SPAC named Churchill Capital Corp IV. Shares of CCIV have surged more than 85% in the past week.
It shouldn’t be a huge surprise that private companies with a good growth story are rushing to go public. The tech heavy Nasdaq is up more than 7% this year and is near an all-time high.
“The main driver of this resurgence is the strength of the equity market overall,” said Patrick Galley, CEO of RiverNorth Capital Management, an investment firm that runs a fund focusing on SPACs.
Galley added that as long as existing SPACs perform well, companies looking to go public though a blank check deal will continue to command higher valuations.
SPACs are having their moment because several well-known companies — such as Richard Branson’s Virgin Galactic, sports betting app DraftKings and QuantumScape, an electric vehicle battery maker backed by Bill Gates and Volkswagen — have successfully raised money that way.
“A few years ago, SPACs were a relatively sleepy corner of the marketplace. That’s not the case anymore,” said David Gallers, co-founder and managing partner of Wealthspring, a firm that invests in SPACs. “Billion dollar unicorns are now embracing it.”
Too many companies trying to go public?
Gallers said he expects the SPAC surge to continue as long as interest rates remain low and broader market conditions are favorable. But he worries that the SPAC boom could be a classic case of too much of a good thing.
“Everyone and their brother and their uncle is lining up to do a SPAC,” he quipped. “There is some rampant speculation now.”
WeWork, which scrapped plans to go public in a 2019 IPO following questions about its valuation and corporate governance practices, is reportedly looking at going public via a SPAC, according to The Wall Street Journal — a sure sign of froth in the market.
That’s why experts say investors must do their homework. Not every company looking to go public is worth buying.
“There will be big winners in the SPAC world, companies that will be with us for a long long time. But there will also be some clunkers,” said Mark Yusko, the founder, CEO and chief investment officer of Morgan Creek Capital Management.
Morgan Creek recently launched an exchange-traded fund focusing on companies that went public through SPACs. The ETF is actively picking which stocks to own as opposed to relying on a passive index.
Yusko said that the fund is focusing on rapidly growing sectors such as sports betting, health care, space and electric vehicles.
“These are industries where their best days are ahead of them and not behind,” Yusko said, adding that top holdings in the ETF include Virgin Galactic, DraftKings, EV maker Fisker and Medicare Advantage insurer Clover Health.
Big companies may also look to capitalize on the stock market’s strength to spin off businesses as separately traded stocks.
German software giant SAP did just that with Qualtrics, its online survey subsidiary, earlier this year. Shares of Qualtrics are up nearly 50% since they debuted in late January.
Qualtrics founder and executive chairman Ryan Smith told CNN Business that “all along, this has been a consistently growing and high performing company” but that Qualtrics will benefit from being a standalone firm that can focus solely on its own business.
More spinoffs are coming. Barry Diller’s IAC, which has a history of spinning off subsidiaries such as Match Group, Expedia and LendingTree, plans to do so with its Vimeo video software unit later this year. Merck, Vodafone and DuPont are planning spinoffs in 2021 as well.
