Trader Talk

Red hot IPO market starting to show signs of fatigue

Key Points
  • Six IPOs are set to price Thursday night.
  • So far in 2017, there have been 144 IPOs, way ahead of the 105 at this time last year, according to Renaissance Capital
  • But signs of fatigue are starting to set in...
CEO Xiaochuan Wang and company Chairman Charles Zhang of China-based Sogou Inc ring the opening bell to celebrate their company's IPO at the New York Stock Exchange in New York, November 9, 2017.
Brendan McDermid | Reuters

The IPO market is heating up again, but some fatigue may be setting in.

Six IPOs are set to price Thursday night, one of the busiest days of the year. The most widely known of the new crop: e-commerce apparel darling Stitch Fix, and Enterprise Security firm Sailpoint Technology.

But signs of fatigue are starting to set in:

1) The Wall Street Journal reported a short while ago that Stitch Fix may have to lower the deal range from $18-$20, citing concerns about competition and the company's long-term growth prospects.

2) Three companies have postponed their IPO this week: Workspace Properties, a suburan office REIT, postponed on Monday. Last night MPM Holdings, a specialty chemical company, postponed (it already trades in the Pink Sheets), and Thursday morning Molino Canuelas, an Argentinian food company, also postponed. As usual, the dreaded "market conditions" are typically cited.

3) Several recent highly touted Chinese IPOs are trading below their IPO price. Consumer finance group PPDAI Group, search engine Sogou, and education firms Four Seasons and Rise Education were all trading below their IPO prices at the close yesterday.

Is the market starting to push back on the IPO rush?

"We had a pretty good run," Cindy Profaca, who tracks IPOs for IPFinancial, told me. Indeed, it's been a very active fall for IPOs. So far in 2017, there have been 144 IPOs, way ahead of the 105 at this time last year, according to Renaissance Capital.

As for the Chinese IPOs, Profaca noted that with more than a dozen that have gone public in the U.S. this year, "We have seen so many of them that are investors are becoming much more discerning when evaluating them."

She cited Chinese search engine Sogou, which priced at $13, well above the price talk of $10-$12. It broke below its IPO price yesterday and is trading near its initial price of $13 today.

She advises investors to be particularly suspicious of Chinese deals, due to problems with their finances in the past. In the initial rush of Chinese IPOs in the mid-2000s, many Chinese companies listing in the U.S. ended up being delisted when their financials did not meet accounting standards. "When I look at these financials, the first question I ask is, is this real?"

But Kathleen Smith, who tracks IPOs at Renaissance Capital and runs the IPO ETF (IPO), a basket of the most recent IPOs, says that this crop of IPOs is different: "This is not Internet bubble 2.0 - back then, 70 percent were unprofitable and many had no revenue at all."

She notes that eight of the twelve that have priced this year are profitable, and four of the twelve are backed by Alibaba or Tencent. Others are backed by notable venture capital firms.

If you want one IPO to take a look at that is pricing tomorrow, my choice is Sailpoint Technologies (SAIL), which is in the red-hot security space. It's well-known that some of the biggest security problems facing corporations are thieves using stolen credentials, or authorized users engaging in unauthorized activities, or former employees accessing the corporate network without permission.

Sailpoint works in a part of the security space known as identity and access management. Simply put, they track users on networks. They provide visibility into which users have access to resources, who should have access and how that access is being used.

Here's an extreme example: a couple months ago, a former Honeywell employee was arrested by the FBI. The man had been in charge of administering a satellite location tracking system for Honeywell that was used by government and corporate clients. The system could be used to track aircraft, vehicles, and vessels. The employee was fired, but apparently retained login credentials that enabled him to continue to access the satellite system. The man turned around and tried to sell access to the system to a Mexican drug cartel. Except the cartel turned out to be FBI undercover agents.

OK, it's an extreme case, but you get the point. Tracking who is authorized to get into your system--and at what level of access they are authorized for--is critical for network security. And Sailpoint plays in this space.