Trader Talk

IPO market gets shot in the arm from China, Roku

Key Points
  • With stock markets at new highs and recent stock debuts performing well, investors are again opening up to IPOs.
  • At least 150 tech unicorns, with valuations of over $1 billion each, are waiting to go public.
  • Investors have been encouraged by the after-market trading in IPOs that have gone public in the last year.
Traders pass in front of an American flag displayed outside of the New York Stock Exchange in New York.
Michael Nagle | Bloomberg | Getty Images

Investors are seeking to raise more than $1 billion from seven initial public offerings this week, the most active week for IPOs since at least June. Three Chinese companies are set to debut, led by Best Inc., an Alibaba-backed logistics company initially seeking to raise $869 million, the biggest IPO of the quarter.

Overnight, it was reported that Best Inc. cut the deal size to $472.5 million at the midpoint, down from $869 million.

Next week will be strong as well, with two tech companies coming: Roku, which is seeking to raise $204 million at a valuation of $1.5 billion, and used-car service CarGurus (from the founder of TripAdvisor), seeking to raise at least $100 million with a likely valuation of roughly $1 billion.

It's happening again: the IPO market is heating up. It's happened a couple times in the last year, only to peter out. But with markets at new highs and recent IPOs performing well, the market is again opening up. Whether it lasts is still uncertain.

There's certainly no shortage of prospects: at least 150 tech unicorns (those companies with valuations over $1 billion) are waiting to go public.

The biggest deal this week — and the biggest IPO of the quarter — is Alibaba-backed Chinese logistics firm Best Inc, which will seek to begin trading at the NYSE on Wednesday. The delivery business is big in China, but Best is fifth in a very competitive market. It's still unprofitable, according to Renaissance Capital, and its competitor, ZTO Express, is not exactly offering great comfort. It went public in October 2016 at $19.50, and is now at $14.89 at the NYSE.

Also from China this week: Secoo Holding. Luxury goods is a hot space in China. Secoo makes a market for pre-owned luxury goods, a space that Alibaba and JD.com have also been trying to enter (read: serious competition). They'll be seeking to raise $106 million and are scheduled to begin trading Friday at the Nasdaq.

Rounding out the China offerings is biotech firm Zia Lab, seeking to raise $100 million.

Also scheduled to trade Wednesday at the NYSE is Despegar, an online travel company based in Buenos Aires. They're backed by Expedia, Tiger Global and General Atlantic (Expedia provides the hotel inventory outside of Latin America). Online travel in Latin America is highly fragmented, but they are a leader, with 11 percent market share.

Finally, it's been a miserable year for energy IPOs, as the market fizzled when oil collapsed in March. That's when Hess Mainstream, a master limited partnership (MLP) that owns oil and gas pipelines, went public.

No one has wanted much to do with energy stocks — IPOs or listed — since then.

But with oil near $50, it's time to try again. On Thursday, Oasis Midstream, a spinoff of Oasis Petroleum, will be the latest to try, seeking to raise $150 million at the NYSE. The attraction, as with most MLP's, is the juicy 7.5 percent yield. They own oil and natural gas pipelines primarily in the Williston Basin in eastern Montana, western North Dakota, South Dakota, and southern Saskatchewan

Why the sudden interest in IPOs? Two factors: markets are again at new highs, and investors have been encouraged by the after-market trading in IPOs that have gone public in the last year.

I know, Blue Apron and Snap have been failures. But Kathleen Smith, of IPO research firm Renaissance Capital, points out that those have been the exception to the rule. Her Renaissance Capital IPO ETF (IPO), a basket of the largest 60 most recent IPOs, is up 27 percent this year.

Many of those stocks have had big out-performance this year:

Recent Top IPO performers (YTD)

Ferrari (RACE) +89%

Square (SQ) +109%

First Data (FDC) +27%

Atlassian (TEAM) +50%

MGM Growth Properties (MGP) +21%

The message: while public investors drive a hard bargain and want initial prices as low as possible, investors have been rewarded. For every Blue Apron and Snap, there are more winners.

That is not lost on those seeking to come to market.