Trader Talk

IPO window is shutting, and that's a good thing

Traders on the floor of the New York Stock Exchange.
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Two weeks ago I mentioned early signs of a flutter in the red-hot IPO market.

Those signs are now unmistakable.

A month ago, almost every IPO--particularly anything tech-related--priced at the high end of the price talk and had a big pop on its first day.

My, how things have changed.

Since Zoe's Kitchen (ZOES) priced on April 10, 16 IPOs have priced...not a single IPO has priced above the midpoint of its range.

So far this year, there have been 23 tech IPOs, according to Renaissance Capital.

The average first-day return of a tech IPO has been 30 percent. Amazing, eh?

But the average after-market return (after the first day) has been a DECLINE of 11.3 percent.

Take Castlight Health (CSLT),which went public on March 13. It provides software that helps self-insured employers control healthcare costs. The original price talk was $9-$11, it priced at $16, and the first day closed over $40, up 148 percent. Wow!

It is now at $13.80, 13 percent below its IPO price.

Huh? The stock is UP 148 percent on its first day, and is now 13 percent below its IPO price?

Take a look at the prices of a few other tech or tech-like companies after their first day of trading:

IPOs after first day:

What happened? Two things happened: 1) the overall market uptrend broke in the beginning of April, and 2) the appetite for high-risk/high-growth waned.

In the case of Castlight, this was one of those cloud companies with no earnings, a subscription model.

Here's another example: Varonis (VRNS), which provides software that manages data security and other data, went public February 27 at $22. It closed over $40 on the first day, up 100 percent.

It's now at $26.50.

OK, you say, it's still above its initial price. But, I ask you: if you were an average investor who bought this stock for $40 on the first day, how would you feel about buying more IPOs after seeing this one trading at $26 six weeks later?

At least there's no tech IPOs coming next week. There's Papa Murphy's (FRSH), a pizza company, but the biggest deal is Ares Asset Management (ARES), an "alternative" asset management company. The word "alternative" is a phrase meaning "anything but stocks."

So what's next? Oddly, nothing has jumped on to the calendar recently. The deal calendar is very low. There is silence.

That's a sign the market is under stress.

Here's how it works: A company announces it has filed to go public. Right now, there are 118 IPOs that have filed to go public, trying to raise $25 billion, according to Renaissance.

They include companies like Box, Synchrony Financial (consumer lending arm of GE), and (Chinese online sales platform).

And that's just those that are public; there are probably 100 that are in "confidential" filings with the SEC that have not been publicly announced yet.

But there's a big gap between ANNOUNCING you are going public and GOING public.

Some time after announcing it's going public, the company will set terms by announcing a price range for the IPO, then will begin a road show. It tells you it is actively marketing. Then it goes public.

The time between setting terms and going public is usually about two weeks.

But suddenly, we don't hear anything from the hot space: Technology.

Not a single tech company has filed for terms since Sabre (SABR) last week.

That means no tech companies are beginning road shows. Why not? Because they are afraid.

Of course, IPO issuers are still talking up the business. They say, "Look how many IPOs have been done, you can go too!"

But that's a bad way to look at it. When you price below the price talk, or the low end of the price talk, that's a disappointment.

When you have the kind of declines we have seen from the first day pops, that's a disappointment.

This is a good turn of events. We did have froth. This is now taking froth out.

It will set up for the next round. Some companies may not make it, but most will go public. But they will come at lower prices. Good for investors.

What needs to happen? First, we need the stock market to stabilize. Then, we need more stability in the IPO market.

Watch the Renaissance Capital IPO ETF (IPO), a basket of over 60 IPOs, which is now down 2.8 percent this year, versus a decline of 0.7 percent for the S&P 500. It's down 12 percent since hitting its high in early March. That's where to look for stability.

And watch to see if any tech companies announce price terms next week and begin a road show. If we hear nothing—silence—that will be the biggest indicator of all the IPO boom has withered. For the moment.