LinkedIn’s IPO, almost exactly one year ago, was a smashing success (shares priced at $71, the stock opened at $83 and LNKD finished last Friday’s session just north of $99). However, this amenable sequence appears to be more the exception than the rule of late. Exhibit 1 below underscores the performance difficulties encountered by several Tech-IPOs with significant public interest. Notice that of the four names featured in the chart, all are trading below their first-day-of-trading opening price. Moreover, only Yelp currently trades above its offer price. Thus the environment even for hot IPOs appears challenging.
Of note, an obvious difference between the Facebook offering and similar, more successful deals is sheer size. To wit, LinkedIn offered less than 8 million shares when the company presented itself to public markets last Spring (generating gross proceeds of over $621.25 million). Currently, the stock trades at more than a 39% premium to its offer price (based on Friday’s close). Similarly, Yelp placed only a bit more than 7 million shares in its IPO two months ago, raising $107.25 million. This stock is up 24% vs. its offer price through Friday’s close.
These stats compare to Facebook’s placement of 421 million shares Friday, which produced gross capital amounting to over $16 billion. While these isolated data points are hardly sufficient for a conclusive pronouncement, at the very least, they are consistent with the idea that supply might be a relevant factor when assessing future performance of IPO shares.
Moving on, broader perspective on the historical success and the future prospects of recent IPOs might be ascertained from The Bloomberg IPO Index, which is a cap-weighted measure of stocks in their first year of trading. All IPOs (excluding unit offerings, closed-end funds and ADRs) with an initial market cap of $50 million or more are included in the index.
An overlay of Coppock momentum on the IPO Index suggests that new shares are likely to struggle through the remainder of May (see Exhibit 2 below). A bottom in the daily oscillator looks due at month-end, which might result in a pause in the short-term pressures. However, intermediate-term momentum looks set to worsen through much of July. This suggests that while prices may be hard(er) pressed to fall by June, the trend of one larger degree will still be down, so one should not expect meaningful appreciation.
Momentum at the longer-term (monthly) level suggests that a summertime bottom is in the offing. Troughs in the weekly and monthly series will likely converge in time to form a compelling buy signal for the IPO space in mid- to late-July. On a more immediate basis though, weakness looks more likely to be the order of the day.
Given the tendency for a rising tide to lift all boats, Facebook will likely benefit from a mid-year inflection in momentum for prices of new issues. However, the logical corollary, pertaining to falling tides, appears more relevant over the near-term.
Stay tuned and trade safe!