Comparing IPO Party Like It’s 1999 Is Spin Doctor FantasyMichael P. Regan
With the possible exception of hearing a Spin Doctors song on the radio, nothing conjures up flashbacks to the bubbly 1990s like the past year’s boom and mini-bust in shares of initial public offerings.
The Bloomberg IPO Index, which gauges the performance of stocks during their first year, surged 64 percent in 2013 to snap a two-year decline and more than double the performance of the Standard & Poor’s 500 Index. It added another 2.6 percent through March 6 before sinking as much as 5.3 percent. King Digital Entertainment Plc, maker of the “Candy Crush” game and one of the year’s most closely watched IPOs, is down 11 percent since debuting a week ago.
Now comes news that Virtu Financial Inc. is delaying its initial public offering, two people with knowledge of the matter told Bloomberg News. This brings to mind the latter stages of the dot-com rally, when the Spin Doctors couldn’t buy a hit and IPOs were postponed left and right under the boiler-plate rationale of “adverse market conditions.”
The comparisons should only go so far. Though Virtu hasn’t explained why it’s postponing its debut, the chief suspect is not “market conditions.” Rather it’s the existential crisis erupting in Virtu’s business of high-frequency trading following a critical book on the subject by Michael Lewis and a swarm of investigations into the practice.
In fact, the comparison gets ludicrous if you think about it long enough. The irony is that high-speed traders like Virtu are under scrutiny for perceptions they make too much money -- Virtu’s S-1 filing showed it only lost money on one day in five years -- whereas revenue and profits were a mere twinkle in the eye of prospectuses for many of the firms that canceled IPOs at the end of the dot-com boom.
Bringing hard data into the discussion shows that Virtu’s delay is not indicative of a trend. Globally, only 11 IPOs have been withdrawn this year, which is 80 percent less than during the same period in 2013, according to data compiled by Bloomberg. In the U.S., only two have been withdrawn, an 85 percent decrease from last year. None have been withdrawn in the U.S. in the last month, a period which encompasses the swoon in the IPO index.
Even at last year’s 64 percent, the rally in IPOs is nowhere near the fever seen in the dot-com days. The Bloomberg index surged 256 percent in 1999 to cap a 1,500 percent five-year bonanza. It crashed 74 percent between March 2000 and April 2001. Looking at valuations, the IPO stocks trade at 0.9 times sales, a little more than half of the 1.7 multiple for S&P 500 companies. At its frothiest in 1996, the IPO valuations were more than 33,000 times the S&P 500’s price-to-sales.
“The IPO market has definitely gotten a little crazy lately, but the action in them is nothing like we saw back in 1999,” Bespoke Investment Group wrote in a March 31 note.
So if you’re itching for some 1990s nostalgia, it’s best to stick with the Spin Doctors. They’ll be playing at a bowling alley in Brooklyn on May 16.